Home Equity Loan vs. HELOC: What’s the Difference?

Home equity is the percentage of your home you own outright, as opposed to the amount you still owe on a mortgage. If you made a 10% down payment, you’d start with 10% equity and increase from there with each mortgage payment.

Home equity lines of credit (HELOCs) and home equity loans let homeowners tap the value of their houses to access cash for home improvement projects, college tuition, debt consolidation and more.

But, there are significant differences between HELOCs and home equity loans, including how interest accrues and how you pay back your lender.

A home equity loan is a second mortgage. Instead of paying for your house, though, it’s providing you with a lump sum of cash.

Most lenders approve home equity loans for 80% or 85% of the house’s value, but some go higher. Rocket Mortgage, for example, has a maximum loan-to-value (LTV) ratio of 95%.

Some lenders work with borrowers with bad credit or other risk factors, including LoanDepot and TD Bank, but you should expect higher interest rates. You may want to consider working with a mortgage broker or getting a co-signer.

The interest rate on a home equity loan is usually fixed and borrowers repay the loan in monthly installments for anywhere from 5 to 30 years.

Home equity loans are an attractive alternative to personal loans because of their lower rates and longer repayment terms. There’s no limit on what you can use the loan for, but the interest is only tax-deductible if it’s spent on building, repairing or renovating your property.

And, because you’re using your house as collateral, your lender can force you into foreclosure if you fail to make payments.

Like other financial products, home equity loans vary by lender. Consider how much you need to borrow, the interest rate you can afford and how much you have to put towards closing costs.

Best for large loans: Flagstar Bank

Flagstar doesn’t charge closing fees and will approve home equity loans for as little as $10,000 or as much as $1 million, a much wider range than most competitors.

Loan amount: $10,000 to $1 million 
Repayment terms: 10, 15 or 20 years
Maximum loan-to-value ratio: 80%

Best for high loan-to-value ratio: Rocket Mortgage

Rocket Mortgage approves home equity loans for up to 90% of a home’s value, higher than many competitors.

Loan amount: $45,000 to $500,000
Repayment terms: 10 or 20 years
Maximum loan-to-value ratio: 90%

While a home equity loan is a lump-sum cash payment, a home equity line of credit (or HELOC) is a line of revolving credit, like a credit card, with a credit limit you can keep borrowing up to so long as you make payments.

Borrowers have a draw period, usually 10 to 15 years, to can tap that line of credit. During the draw period, you’re only required to make interest payments. If you make payments on the principal, though, your available credit goes back up.

When the draw period ends, you can no longer use your line of credit and begin making payments on the interest and principle. You’ll have a set term, often 20 years, to repay the balance and interest.

The credit and equity requirements for a HELOC are similar to home equity loans. And, like a home equity loan, your lender can force you into foreclosure for lack of payment.

One notable difference is that HELOCs usually have an adjustable rate. And while closing on a home equity loan can take as long as two months, you can access HELOC funds in as little as a few days.

We picked the best lenders for a HELOC based on rates, terms, fees, customer service and other factors.

Best for no fees: Bank of America

Bank of America doesn’t charge application fees or closing costs for HELOCs. And, with more than 3,800 branches nationwide, you can count on in-person service when you need it.

Draw: $15,000 up to $1 million
Repayment term: 20 years
Maximum loan-to-value ratio: 85%

Best for low rates: Third Federal

Third Federal advertises that its interest rates on HELOCs are 0.50% lower than the industry average and it doesn’t charge closing costs, which can equal up to 5% of your loan amount. There’s also no minimum draw, so you can spend just what you need.

Draw: $10,000 up to $300,000
Repayment term: 20 years
Maximum loan-to-value ratio: 80%

Which loan type is better for you depends on several factors, including your risk tolerance, what you want to use the money for and how much you have on hand to put toward repayment.

A home equity loan could make more sense if you need a one-time cash infusion to pay for repairs or buy a car. But a HELOC could be the better option if you have recurring costs, like ongoing home renovations or college tuition.

With a HELOC, you only pay interest on the portion of the line of credit you use. If you tap too much of your line of credit at once, however, your credit score will take a real hit. (Some experts suggest keeping your credit utilization rate below 30%, while others say below 10% is best.)

There are other ways to access cash, including some that don’t leverage your home’s value.

Cash-out refinancing

Cash-out refinancing is a type of mortgage refinancing that lets borrowers get more than their existing home loan balance and receive the remaining funds as cash.

Refinancing your mortgage will probably take longer than a home equity loan or HELOC, but the credit requirements are more flexible and you’ll likely get a lower interest rate.

Home equity sharing

If you don’t want to take out a loan or refinance — or if you don’t have a strong enough financial profile — a home equity sharing agreement lets you access cash in exchange for partial ownership of your home and a share of any future appreciation.

Instead of monthly payments, you’ll repay the loan in full at the end of your term (anywhere from 10 to 30 years) or when you sell the house.

And, rather than interest, you’ll pay an amount equal to your risk adjustment rate, based on the home’s value at the end of the term.HomeTap, Point and HomePace are among the top home equity investment (HEI) companies.

Personal loan

If you don’t want to use your house as collateral, you can always apply for a personal loan. It’s a better option if you need less, since lenders usually cap personal loans at $50,000 or $100,000.

Your interest rate will likely be higher than with a home equity loan or HELOC and the repayment term shorter. In addition, you won’t be able to write off the interest — even if you use it for home renovations.

The chief benefits of a personal loan are the lower credit score threshold and there’s no risk of foreclosure.

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