Both let you borrow against the equity in your home. One gives you a lump sum at a fixed rate; the other works more like a credit card with a variable rate.
Home equity is the difference between your home’s value and what you owe. Two products let you borrow against it, and they suit different needs.
| Home equity loan | HELOC | |
|---|---|---|
| How you receive money | One lump sum | Draw as needed, up to a limit |
| Interest rate | Usually fixed | Usually variable |
| Payments | Fixed monthly payments from the start | Often interest-only during the draw period, then principal and interest |
| Best for | One-time costs with a known amount | Ongoing or uncertain costs |
How much you can borrow
Lenders look at your combined loan-to-value ratio: your first mortgage plus the new loan, compared with the home’s value.
Example: a home worth $400,000 with a $220,000 mortgage, and a lender limit of 85% combined, allows total borrowing of $340,000. Subtract the $220,000 you owe, and the most you could borrow is about $120,000, subject to your income and credit.
The HELOC payment jump
Many HELOCs have a draw period, often around 10 years, when you can borrow and may pay only interest. Then the repayment period begins: you can no longer borrow, and payments include principal. That shift can raise the monthly payment sharply, especially if rates have risen too.
Plan for both phases. Before opening a HELOC, ask the lender for the payment once repayment begins, at the current rate and at a higher one.
Taxes
Interest on home equity debt is deductible only when the money is used to buy, build or substantially improve the home securing the loan, and only within the overall limit on mortgage debt. Using a HELOC to pay off credit cards doesn’t qualify. More on the rules in can you deduct mortgage interest?
The risk to keep in mind
Both loans are secured by your home. Borrowing to consolidate unsecured debt turns it into debt that could cost you your house if things go wrong. If you need a large sum and current mortgage rates are favorable, compare with a cash-out refinance.
The short version
- A home equity loan pays a lump sum, usually at a fixed rate.
- A HELOC is a revolving line of credit, usually with a variable rate and a draw period followed by a repayment period.
- Both are secured by your home, so missed payments can lead to foreclosure.
Readers also ask
How much equity can I borrow against?
Lenders often cap total borrowing, including your first mortgage, at around 80% to 85% of the home’s value, depending on your credit and the lender.
Is HELOC interest tax-deductible?
Only if the money is used to buy, build or substantially improve the home that secures the loan, and within the overall mortgage debt limits.
Can a lender freeze my HELOC?
Yes. Lenders can freeze or reduce a credit line in some situations, such as a significant fall in home value.
This guide is general information about U.S. mortgages, not financial, tax or legal advice. Loan terms depend on the lender and on your credit, income and property, so confirm the details with your lender, and see consumerfinance.gov for official guidance.
