What is the difference between a home equity loan and a HELOC?

A home equity loan gives you a lump sum at a fixed rate with fixed monthly payments (like a second mortgage). A HELOC is a revolving line of credit with a variable rate — you draw money as needed during the draw period and only pay interest on what you borrow. Home equity loans are better for one-time expenses; HELOCs are better for ongoing or uncertain costs.

How much home equity can I borrow?

Most lenders allow you to borrow up to 80-85% of your home's value minus your existing mortgage balance. For example, if your home is worth $500,000 and you owe $300,000, your available equity is $100,000-$125,000 (80-85% of $500K = $400K-$425K, minus $300K mortgage).

Home Equity Loan vs HELOC: Which Is Better for You? (2026)

Your home equity is potentially your largest source of borrowing power. Here’s how to use it wisely — and when each option makes sense.

Home Equity Loan vs HELOC: Side by Side

Feature	Home Equity Loan	HELOC
How you get money	Lump sum upfront	Draw as needed (like credit card)
Interest rate	Fixed	Variable (usually)
Average rate (2026)	8.25%	8.50% (introductory may be lower)
Monthly payment	Fixed (predictable)	Variable (changes with balance + rate)
Repayment period	5-30 years	10-year draw + 20-year repayment
Closing costs	2-5% of loan amount	0-2% of credit line
Interest-only option	No	Yes (during draw period)
Tax deductible?	Yes (if used for home improvement)	Yes (if used for home improvement)
Best for	One-time large expense	Ongoing or uncertain costs

How Much Can You Borrow?

Home Value	Mortgage Balance	Available Equity (80% LTV)	Available Equity (85% LTV)
$300,000	$200,000	$40,000	$55,000
$400,000	$250,000	$70,000	$90,000
$500,000	$300,000	$100,000	$125,000
$600,000	$350,000	$130,000	$160,000
$750,000	$400,000	$200,000	$237,500
$1,000,000	$500,000	$300,000	$350,000

Formula: (Home value × LTV limit) - Mortgage balance = Available equity

Cost Comparison: $75,000 Borrowed

Home Equity Loan ($75,000 at 8.25%, 15-Year Fixed)

Item	Amount
Monthly payment	$727
Total interest (15 years)	$55,860
Total cost	$130,860
Closing costs (3%)	$2,250
All-in cost	$133,110

HELOC ($75,000 at 8.50% Variable, 10/20 Structure)

Phase	Payment	Details
Draw period (years 1-10)	~$531 interest-only	Minimum interest-only payments
Repayment period (years 11-20)	~$814 P&I	Full principal + interest
Total interest (if drawn immediately, interest-only during draw)	~$87,000	Costs more due to slower payoff
If paying P&I from day 1	~$700/mo	Similar total cost to HE loan
Closing costs	$0-$750	Often lower than HE loan

Key insight: HELOCs cost more if you only make minimum payments during the draw period, but they’re cheaper if you’re disciplined about paying principal.

Interest Rates by Credit Score

Home Equity Loan Rates (2026)

Credit Score	Rate Range	Rate on $100K
760+	7.00-8.00%	~$898/mo (15-yr)
720-759	7.50-8.50%	~$928/mo
680-719	8.25-9.50%	~$972/mo
640-679	9.50-11.00%	~$1,044/mo
620-639	11.00-13.00%	~$1,137/mo

HELOC Rates (2026)

Credit Score	Rate Range	Notes
760+	7.25-8.50%	May get intro rate 1-2% lower for 6-12 months
720-759	7.75-9.00%	Good rates available
680-719	8.50-10.00%	Average rates
640-679	10.00-12.00%	Limited lender options
620-639	12.00-14.00%	Few lenders available

When to Use Each Option

Home Equity Loan Is Better For:

Use Case	Why
Major home renovation (known cost)	Fixed payment, predictable budget
Debt consolidation (credit cards)	Lock in lower fixed rate
One-time large purchase	Get all money at once
You prefer payment certainty	Fixed rate = fixed payment forever
You’d be tempted to overspend with open line	No revolving credit temptation

HELOC Is Better For:

Use Case	Why
Home renovation (uncertain/phased costs)	Draw as needed, only pay interest on what you use
Emergency fund backup	Available but costs nothing if unused
Business expenses (variable)	Flexible draws
You’re disciplined with credit	Won’t overborrow just because you can
Ongoing expenses over time	Multiple draws without re-applying
Rates may drop soon	Variable rate benefits when rates fall

Tax Deductibility Rules

Use of Funds	Tax Deductible?	Details
Home improvement/renovation	Yes	Interest on up to $750K total mortgage debt
Building an addition	Yes	Counts as home improvement
New roof, HVAC, kitchen remodel	Yes	Substantially improves the home
Debt consolidation	No	Not used to buy, build, or improve home
College tuition	No	Not home-improvement related
Vacation/general spending	No	Must be home-related
Investment property renovation	Yes	Deductible as investment expense

Risks and Downsides

Risk	Home Equity Loan	HELOC
Foreclosure if you default	Yes — your home is collateral	Yes — your home is collateral
Rate risk	None (fixed rate)	High — rates can increase significantly
Overspending risk	Low (one-time disbursement)	High — revolving credit temptation
Payment shock	None	Yes — when draw period ends, payments can double
Home value decline	Underwater risk if values drop	Same risk
Closing costs	2-5% ($1,500-$5,000+)	Usually lower (0-2%)
Annual fees	None	$25-$75/year (some lenders)
Early termination fee	Check terms	Some charge if closed within 2-3 years

Alternatives to Consider

Alternative	Pros	Cons
Cash-out refinance	One loan, potentially better rate	Closing costs, resets mortgage term
Personal loan	No home at risk, fast approval	Higher rate, shorter terms
401(k) loan	Borrow from yourself, low rate	Reduces retirement savings, job-loss risk
Credit card (0% intro)	No closing costs, 0% for 12-21 months	Rate jumps to 20%+ after intro
FHA 203(k) renovation loan	Finance purchase + renovation	Complex process, FHA requirements
Contractor financing	Convenient	Often higher rates

Application Requirements

Requirement	Home Equity Loan	HELOC
Credit score	620+ (680+ recommended)	620+ (680+ recommended)
Home equity	15-20% after loan	15-20% after full draw
DTI ratio	Under 43%	Under 43%
Employment	Stable 2+ years	Stable 2+ years
Home appraisal	Required ($300-$500)	Required or AVM
Documentation	Income, assets, insurance	Income, assets, insurance
Timeline to close	2-6 weeks	2-6 weeks
Property types	Primary, secondary, investment	Usually primary residence only