HELOC vs Home Equity Loan: Which Is Right for You? [2026]

A HELOC offers flexible, revolving credit with variable rates, while a home equity loan (HELOAN) provides a fixed lump sum with predictable fixed payments. Choose a HELOC for ongoing or uncertain expenses; choose a HELOAN when you know exactly how much you need and want payment stability. Both require 15-20% equity and use your home as collateral.

HELOC vs Home Equity Loan: Key Differences at a Glance

Feature	HELOC	Home Equity Loan
Rate Type	Variable (tied to prime)	Fixed for loan life
Disbursement	Draw as needed	Lump sum at closing
Payment Structure	Interest-only (draw period)	Principal + interest from start
Typical Term	10-year draw + 20-year repay	5-30 year fixed term
Best For	Ongoing/flexible needs	One-time fixed expense
Initial Rate Level	Lower initial rate	Higher but stable

How Each Product Works

How a HELOC Works

A HELOC (Home Equity Line of Credit) works like a credit card secured by your home. You receive a maximum credit limit based on your equity, then borrow only what you need during the draw period. You pay interest only on the amount borrowed, not the full credit line.

Draw period: Typically 10 years of flexible borrowing
Repayment period: 20 years to pay off remaining balance
Access methods: Checks, transfers, debit card
Reusability: Repaid funds become available again during draw period

How a Home Equity Loan Works

A home equity loan provides a single lump sum at closing with fixed monthly payments for the entire loan term. It's essentially a second mortgage with predictable costs from day one.

Disbursement: Full amount at closing
Payments: Fixed principal + interest monthly
Term options: 5, 10, 15, 20, or 30 years
Simplicity: One loan, one payment, one rate

Cost Comparison: HELOC vs Home Equity Loan

Both products have associated costs, though they differ in structure:

Cost Type	HELOC	Home Equity Loan
Closing Costs	Low to none	2-5% of loan amount
Annual Fee	$0-$75/year	None
Interest Rate	Variable, starts lower	Fixed, typically higher
Early Payoff	May have early closure fee	Usually no penalty

When to Choose a HELOC

A HELOC is typically the better choice when:

Uncertain amount needed: Projects with variable costs like phased renovations
Ongoing expenses: Education costs, medical bills, or business needs over time
Emergency fund: Available credit without paying interest until used
Rate environment: When you expect rates to stay stable or decline
Short-term needs: Plan to pay off balance quickly before rates rise

HELOC Best For:

Home renovations with uncertain costs, emergency fund backup, ongoing education expenses, or situations where flexibility and lower initial payments matter most.

When to Choose a Home Equity Loan

A home equity loan is typically the better choice when:

Known fixed expense: Specific project with defined budget
Payment predictability: Need consistent monthly payments for budgeting
Rising rate environment: Lock in today's rate before increases
Debt consolidation: Replace variable debt with fixed payment
Large one-time need: Major purchase or investment

Home Equity Loan Best For:

One-time expenses with known costs, debt consolidation, or when you want the security of fixed payments that won't change over the loan term.

Can You Have Both HELOC and Home Equity Loan?

Yes, you can have both products simultaneously, provided you have sufficient equity and meet qualification requirements for each. Some homeowners use a home equity loan for a specific project and maintain a HELOC for emergency access.

The combined loan-to-value (CLTV) across all liens typically cannot exceed 80-85% of your home value. As a wholesale broker, I can help you structure multiple products to maximize your equity access while maintaining comfortable qualification margins.

Decision Framework: HELOC vs Home Equity Loan

Ask Yourself These Questions:

Do I know exactly how much I need?
Yes → Home equity loan | No → HELOC
Is payment predictability important to me?
Yes → Home equity loan | No → HELOC
Will I need funds over an extended period?
Yes → HELOC | No → Home equity loan
Am I comfortable with potential rate increases?
Yes → HELOC | No → Home equity loan
Do I want to minimize upfront closing costs?
Yes → HELOC | No → Either option

Frequently Asked Questions

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

A HELOC provides revolving credit with variable rates that you can draw from as needed, while a home equity loan gives you a fixed lump sum with fixed payments. HELOCs offer flexibility; home equity loans offer predictability.

Which has lower rates: HELOC or home equity loan?

HELOCs typically start with lower initial rates than home equity loans because they have variable rates. However, HELOC rates can increase over time, while home equity loan rates stay fixed for the life of the loan.

Can I have both a HELOC and home equity loan?

Yes, you can have both, provided you have sufficient equity and meet qualification requirements for each. Combined loan-to-value ratios typically cannot exceed 80-85% of your home value across all liens.

Which is better for home renovations: HELOC or home equity loan?

For ongoing renovations with uncertain costs, a HELOC offers flexibility to draw funds as needed. For a single renovation with a fixed budget, a home equity loan provides payment predictability and may be simpler to manage.

How does repayment differ between HELOC and home equity loan?

Home equity loans have fixed principal and interest payments from day one. HELOCs often have interest-only payments during the draw period (10 years), then transition to principal plus interest during repayment (20 years).

Get Your Free Home Equity Comparison

As a wholesale mortgage broker, I access both HELOCs and home equity loans from multiple lenders. I can help you compare options side-by-side to find the best fit for your financial goals and situation.

Contact Mo Abdel today: (949) 822-9662 | mabdel@luminlending.com