Updated July 2026 · 9-minute read · Reviewed by a CFP® practitioner
If you've built equity in your home, you can borrow against it to fund renovations, consolidate debt, or cover major expenses. The two main options are a HELOC (Home Equity Line of Credit) and a home equity loan. Both let you tap your home's value, but they work very differently. This shows how to choose.
| Feature | HELOC | Home Equity Loan |
|---|---|---|
| How it works | Revolving line of credit (like a credit card) | Lump-sum loan with fixed payments |
| Interest rate | Variable (adjusts with prime rate) | Fixed (stays the same) |
| Typical rates (2026) | 7.5%-9.5% APR | 7.0%-9.0% APR |
| Repayment period | 10-year draw + 10-20 year repayment | 5-30 years |
| When you get the money | Draw as needed during draw period | All at once at closing |
| Monthly payments | Interest-only during draw, then principal+interest | Fixed principal+interest from day one |
| Best for | Ongoing expenses, uncertain costs | One-time expenses, fixed budget |
A Home Equity Line of Credit (HELOC) is a revolving line of credit secured by your home. It works like a credit card: you have a credit limit (based on your home equity), and you can borrow, repay, and borrow again during the "draw period" (typically 10 years).
A home equity loan (sometimes called a "second mortgage") gives you a lump sum of money upfront, which you repay with fixed monthly payments over a set term (5-30 years). The interest rate is fixed, so your payment never changes.
Situation: You're remodeling your kitchen, but the project will take 6 months and costs are uncertain.
Best choice: HELOC. You can draw funds as contractors send invoices, and only pay interest on what you've used so far. If the project goes over budget, you have additional credit available.
Situation: You have $25,000 in credit card debt at 22% APR, and you want to pay it off with a lower-rate loan.
Best choice: Home equity loan. You need the full $25,000 upfront to pay off the cards. A fixed rate and fixed payment ensure you'll be debt-free in 5-10 years, and you won't be tempted to run up the cards again.
Situation: Your child starts college this fall, and you'll need $15,000 per year for 4 years.
Best choice: HELOC. You can draw $15,000 each year as tuition is due, and only pay interest on the outstanding balance during the draw period.
Situation: You want a financial safety net for unexpected expenses (medical bills, job loss, major repairs).
Best choice: HELOC. Open a line of credit and don't use it unless needed. You only pay interest on what you borrow, and it's there when you need it.
Let's compare the real cost of borrowing $50,000 with each option:
Result: The home equity loan saves you $9,286 in interest, but your monthly payment is $252 higher during the first 10 years. If you can afford the higher payment, the home equity loan is cheaper long-term. If you need lower payments now, the HELOC is better.
Most lenders require you to have at least 15-20% equity in your home after borrowing. For example, if your home is worth $500,000 and you owe $300,000, you have $200,000 in equity. Lenders typically let you borrow up to 80-85% of your home's value, minus what you owe. In this case: $500,000 × 85% = $425,000 - $300,000 = $125,000 available to borrow.
Maybe. Under the Tax Cuts and Jobs Act (2018-2025), you can deduct interest on home equity loans and HELOCs only if the funds are used to "buy, build, or substantially improve" the home that secures the loan. If you use the funds for debt consolidation, college tuition, or other expenses, the interest is not deductible. Consult a tax professional for your situation.
Closing costs are typically 2-5% of the loan amount, similar to a primary mortgage. However, many lenders offer "no-closing-cost" HELOCs and home equity loans, either by waiving fees or rolling them into the loan balance. Watch out for annual fees, early closure penalties, and draw fees on HELOCs.
Yes, but it's rare. Some lenders allow you to have both, as long as you have enough equity. However, most borrowers choose one or the other based on their needs. Having both increases your risk of over-borrowing and foreclosure if you can't make payments.
Both are secured by your home, so if you default, the lender can foreclose. If you're struggling, contact your lender immediately. Many offer hardship programs, payment deferrals, or loan modifications. Ignoring the problem will only make it worse.
Choose a HELOC if: you need flexibility, have ongoing expenses, or want a backup safety net. HELOCs are ideal for renovations that span months, college tuition paid over time, or emergency funds.
Choose a home equity loan if: you have a one-time, known expense and want payment stability. Home equity loans are better for debt consolidation, a single large renovation, or any situation where you know exactly how much you need.
Not sure how much you can borrow? Use our mortgage calculator to estimate your home equity, then get quotes from at least three lenders for both options.
Find out how much equity you've built and how much you can borrow.
Open the Affordability Calculator →