Home Equity Loans vs HELOCs: Which Fits Your Need?

When you need cash and your home has built-up value, a home equity loan or a home equity line of credit (HELOC) are two common choices. Both use your home as collateral, but they serve very different purposes. This guide explains how each product works, who benefits most, the tax and fee implications, and practical decision rules I use with clients in my practice.

Sources cited below include the Consumer Financial Protection Bureau and IRS guidance so you can verify rules and tax treatment before you act (CFPB — What is a HELOC? and IRS Publication 936).

Quick comparison at a glance

Home equity loan: fixed lump sum, fixed interest rate, predictable monthly payments, good for one-time projects.
HELOC: revolving line of credit, variable rate (often tied to prime), draw period then repayment period, good for ongoing or unpredictable needs.

How each product actually works

Home equity loan

You borrow a fixed amount up front (for example, $30,000).
The loan typically carries a fixed interest rate and fixed monthly payments over a set term (often 5–30 years).
Because payments are predictable, it’s useful for budgeting and large, one-off expenses such as a major renovation or consolidating a set of high-interest debts into a single payment.

HELOC

You receive a maximum credit line based on your available equity (for example, a $50,000 line).
During a draw period (commonly 5–10 years) you can borrow, repay, and borrow again—similar to a credit card, but secured by your home.
Interest rates are usually variable (Prime + margin). After the draw period, many HELOCs enter a repayment period where you pay principal and interest, which can sharply increase monthly payments.
Some HELOCs offer interest-only payments during the draw period; this keeps payments low at first but can leave a large principal to amortize later.

Real-world examples (from my practice)

Lump-sum project: A client chose a 15-year home equity loan to pay for a kitchen remodel. The fixed 4% rate kept monthly payments stable so they could plan a multi-year budget without refinancing risk.
Ongoing variable needs: A small-business owner used a HELOC to cover seasonal cash-flow gaps. They drew funds twice during a slow season and repaid them when revenues recovered; the line’s flexibility avoided repeated loan applications.

Who should consider each option?

Home equity loan is usually better when:

You need a single, known amount (roof repair, debt consolidation, large medical bill).
You want fixed payments for stable budgeting.
You prefer to lock a low rate now rather than risk future rate increases.

HELOC is usually better when:

Your needs are ongoing or unpredictable (phased renovations, business working capital, education expenses over time).
You want flexibility to borrow only what you use and to repay early without prepayment penalty.
You can tolerate variable interest rates and the chance that payments will rise when the draw period ends.

Eligibility and how lenders calculate how much you can borrow

Lenders look at credit score, income, and combined loan-to-value (CLTV). CLTV is the total of your current mortgage balance plus the requested loan or line, divided by your home’s appraised value. Common limits:

Typical maximum CLTV for home equity products: 80–90% (varies by lender and loan type).
Minimum credit score: many lenders start around 620, but better rates require 700+.

Always check multiple lenders; local banks and credit unions sometimes offer more favorable underwriting than national banks.

Costs and fees — what to watch for

Closing costs: Home equity loans often have higher upfront closing costs (appraisal, title, origination) similar to a second mortgage. HELOCs sometimes have lower upfront fees but may include annual fees.
Variable-rate risk: HELOC rates commonly track the prime rate. When the index rises, payments do too.
Interest-only payments: Available on many HELOCs during the draw period but they increase principal risk later.
Early termination and inactivity fees: Some HELOCs have inactivity fees or a charge to close the line early.

For more on typical HELOC fees and disclosures, see the FinHelp glossary page on HELOC annual fees and disclosures.

Tax treatment (important and often misunderstood)

Under the Tax Cuts and Jobs Act (TCJA) rules currently in effect, interest on home equity loans and HELOCs is deductible only when the borrowed funds are used to buy, build, or substantially improve the home that secures the loan. This is clarified in IRS guidance (see IRS Publication 936). In practice:

If you use a home equity loan to renovate the home securing the loan, the interest may be deductible subject to limits.
If you use a HELOC to pay off credit card debt or buy a car, the interest is generally not deductible.

Talk to a CPA about your specific situation before assuming a deduction.

Decision framework: pick the right tool

Ask these focused questions:

Is the need a one-time lump sum or ongoing? (Lump sum → home equity loan; ongoing → HELOC.)
Can you tolerate variable payments and interest-rate risk? (If no → home equity loan.)
Will the funds be used to substantially improve the home? (If yes and taxes matter → consult a tax pro.)
How important is predictability vs flexibility in your monthly budget?

If you favor predictability and plan to pay the balance on a fixed schedule, a home equity loan is often the safer choice. If flexibility matters and you can manage rate volatility, a HELOC makes sense.

Common mistakes to avoid

Using a HELOC for non-essential recurring spending without a repayment plan—this can leave you with a large balance when the repayment period begins.
Assuming the initial low HELOC rate remains forever—many HELOCs reprice with market rates.
Ignoring closing and annual fees—these can erode any rate advantage.
Treating either product as free cash; both put your home at risk if you default.

When to consider alternatives

Cash-out refinance: If current mortgage rates are lower than your existing rate, a cash-out refinance may be cheaper and can combine first mortgage and cash-out into a single loan—compare to a HELOC first (see FinHelp’s article: HELOCs vs Cash-Out Refinances: Which Option Fits Your Goal?).
Unsecured personal loan: For small amounts where you don’t want to use your home as collateral.
Credit cards only when short-term and you can pay off quickly—never for long-term financing.

For using a HELOC to pay down high-interest balances, see FinHelp’s practical guide: Using a HELOC to Consolidate High-Interest Debt: Pros and Cons.

Practical steps before you apply

Calculate your CLTV: (First mortgage balance + requested new loan) ÷ home value.
Compare APRs and total costs from multiple lenders.
Ask about draw period length, interest-only options, rate caps, and conversion or fixed-rate options.
Read the HELOC disclosures carefully for early close, inactivity, and annual fees.
Consult a CPA on deductibility if you plan to claim interest.

Final recommendations (from my practice)

Use a home equity loan for a large, planned expense when you want fixed monthly payments and rate certainty.
Use a HELOC when you need a flexible source of funds and you understand how variable rates will affect future payments.
Always plan for the end of the draw period for a HELOC—model worst-case rate increases and how they affect cash flow.

Authoritative sources & disclaimer

Consumer Financial Protection Bureau — What is a HELOC? (CFPB) https://www.consumerfinance.gov/ask-cfpb/what-is-a-heloc-en-1791/
IRS Publication 936 — Home Mortgage Interest Deduction https://www.irs.gov/publications/p936

This article is educational and not personalized financial advice. Consult a licensed mortgage professional and a tax advisor or CPA to evaluate options for your situation.

Home Equity Loans vs HELOCs: Which Fits Your Need?