If you own a home with equity, you have access to some of the cheapest borrowing available — typically 7–10% APR vs. 20%+ for credit cards. Home equity loans and HELOCs both let you borrow against your home's equity, but they work differently. The right choice depends on what you're financing and how you prefer to borrow.
FHA Loan vs. Conventional Loans (Mortgage 2026) | NerdWallet
Source: NerdWallet
Side-by-Side Comparison
| Feature | Home Equity Loan | HELOC |
|---|---|---|
| Disbursement | Lump sum | Draw as needed |
| Rate type | Fixed | Variable (usually) |
| Typical APR (2026) | 7.5–9.5% | 8.0–10.5% |
| Repayment | Fixed monthly payments | Interest-only during draw period, then principal + interest |
| Draw period | N/A (one-time disbursement) | 5–10 years |
| Repayment period | 5–30 years | 10–20 years |
| Best for | One-time, known expenses | Ongoing or uncertain expenses |
Home Equity Loan Explained
A home equity loan (sometimes called a "second mortgage") gives you a lump sum at a fixed interest rate, repaid over a set term. Your home serves as collateral.
How much can you borrow? Most lenders allow you to borrow up to 80–85% of your home's value minus your existing mortgage balance.
Example: Home value $400,000 × 80% = $320,000. Minus existing mortgage $250,000 = $70,000 available.
Pros: Fixed rate (predictable payments), lump sum (good for known expenses), lower rate than personal loans or credit cards.
Cons: Your home is collateral (risk of foreclosure if you default), closing costs (2–5% of loan amount), less flexible than a HELOC.
HELOC Explained
A HELOC (Home Equity Line of Credit) is a revolving credit line secured by your home — similar to a credit card but with much lower rates. You draw funds as needed during the draw period (typically 5–10 years), then repay during the repayment period (10–20 years).
Draw period: You can borrow, repay, and borrow again. Payments are typically interest-only during this phase.
Repayment period: No more draws. Payments include principal and interest, which can cause payment shock if you've been making interest-only payments.
Variable rate risk: Most HELOCs have variable rates tied to the Prime Rate. When rates rise, your payment rises. Some lenders offer fixed-rate HELOC options.
When to Use Each
Use a home equity loan for:
- A specific, one-time project with a known cost (kitchen remodel, roof replacement)
- Debt consolidation (replacing high-rate debt with a fixed lower rate)
- When you want payment certainty and protection from rate increases
Use a HELOC for:
- Ongoing home improvement projects where costs are uncertain
- Emergency backup fund (draw only if needed)
- Business expenses with variable timing
- When you want flexibility and may not need the full amount
The Risks of Borrowing Against Your Home
Both products use your home as collateral. If you default, the lender can foreclose. This is the critical difference from unsecured debt like credit cards or personal loans.
- Don't borrow for depreciating assets. Using home equity to buy a car or take a vacation means you're putting your home at risk for something that loses value.
- Don't borrow more than you can repay. The payment shock when a HELOC enters repayment phase catches many borrowers off guard.
- Consider home value risk. If home values decline, you could owe more than your home is worth — making it difficult to sell or refinance.
Good uses: Home improvements that add value, debt consolidation at a significantly lower rate, education expenses with a clear repayment plan.
Bad uses: Vacations, cars, discretionary spending, investing in volatile assets.
FAQ
Is home equity loan interest tax deductible?
Interest is deductible only if the loan is used to "buy, build, or substantially improve" the home securing the loan. Using home equity for debt consolidation or personal expenses is not deductible. Consult a tax advisor for your specific situation.
How long does it take to get a home equity loan?
Typically 2–6 weeks from application to funding. The process includes an appraisal, title search, and underwriting — similar to a mortgage.
What credit score do I need for a home equity loan?
Most lenders require 620–680 minimum. For the best rates, you need 720+. Lenders also consider your DTI ratio and loan-to-value ratio.
Can I get a HELOC if I have a first mortgage?
Yes — a HELOC is a second lien on your property. You can have both a first mortgage and a HELOC simultaneously, as long as your combined loan-to-value ratio stays within the lender's limits (typically 80–85%).
Home equity is a powerful borrowing tool — but it's not free money. You're putting your home at risk for the benefit of a lower interest rate. Use it strategically for high-value purposes (home improvements, debt consolidation at significantly lower rates) and avoid it for discretionary spending. The rate advantage is real; so is the risk.
