EQUITY: HELOC vs. Home Equity Loan

A home equity loan (HELOAN) gives you one lump sum, usually with a fixed rate and a fixed payment. A HELOC is a credit line you draw from as needed, usually with a variable rate and a payment that can change. Choose a HELOAN for a one-time expense you want paid off on schedule. Choose a HELOC for costs that come in stages.

A lot of homeowners have a great first mortgage rate and real equity. They don't want to touch that first loan. So the question becomes how to borrow against the equity without giving up the rate.

That's exactly what a second mortgage is for. The two main options work very differently.

What is a HELOC?

A home equity line of credit is a revolving line secured by your home. You borrow what

you need, when you need it, up to your limit.

Most HELOCs have a draw period, when you can borrow, followed by a repayment

period, when you pay the balance down. Draw periods are commonly around 10 years,

but terms vary by lender. Many HELOCs allow interest-only payments during the draw

period. Not all of them do.

What is a home equity loan (HELOAN)?

A home equity loan is a lump sum you receive at closing and repay on a set schedule.

Most have a fixed rate, so the payment stays the same until the loan is paid off. Always

confirm that on the actual offer.

How do the payments compare?

Here's $100,000 at an illustrative 8% rate. These are examples to show the math, not

rate quotes.

Payment type	At 8%	At 9%	At 10%
Fully amortizing over 20 years	$836.44	$899.73	$965.02
Interest-only	$666.67	$750.00	$833.33

The interest-only payment looks about $170 cheaper at 8%. But it doesn't pay down a dollar of the balance. After 10 years of interest-only payments, you'd still owe the full $100,000.

And if the HELOC rate rises 2 points, the interest-only payment ($833.33) ends up close to the fixed loan's payment at the original rate, while the balance still hasn't moved.

A lower starting payment usually means a different repayment structure, not a cheaper loan.

When does a HELOC make more sense?

• You're paying for something in stages, like a remodel with contractor draws.

• You want a backup source of funds and may not use all of it.

• You expect to pay the balance down quickly, like after a bonus or a property sale.

• You're comfortable with a payment that can change.

You only pay interest on what you've drawn. If you need $100,000 over a year, a HELOC can cost less in that first year than borrowing it all on day one.

When does a home equity loan make more sense?

• You need the full amount now, like paying off higher-rate debt.

• You want a fixed payment you can budget around.

• You want the balance to have an end date.

• You know yourself, and an open credit line would get used.

What should I ask before signing?

• What happens to my payment when the draw period ends?

• Is the rate fixed, variable, or a mix? What's the index and margin?

• Is there an intro rate, and when does it expire?

• Are there annual fees, closing costs, or early closure fees?

• Is there a balloon payment?

One more: your home secures this debt. Compare the repayment risk, not just the convenience.

Get your FREE WORKSHEET HERE

Is HELOC interest tax deductible?

Sometimes. It depends on how you use the money and your overall tax situation. Ask your CPA before you count on it.

Compare your actual offers

The free EQUITY worksheet puts both offers side by side, line by line, and includes a payment explorer for amortizing, interest-only, and higher-rate scenarios. [TOOL LINK]

Related reading: [LINK: HELOC page] · [LINK: fixed second mortgage page] · [LINK: cash-out refinance vs HELOC]

FAQ

What is the difference between a HELOC and a home equity loan? A HELOC is a revolving line you draw from as needed, usually with a variable rate. A home equity loan is a lump sum repaid on a set schedule, usually with a fixed rate.

Is a HELOC or a home equity loan better for a remodel? A HELOC often fits a remodel paid in stages, because you only pay interest on what you've drawn. A home equity loan fits when you need the full amount up front and want a fixed payment.

Can I get a HELOC without refinancing my first mortgage? Yes. A HELOC or home equity loan is a separate second mortgage, so your existing first mortgage and its rate stay in place.

Do HELOC payments go up? They can. Variable rates can rise, and payments usually increase when the draw period ends and you start repaying principal.

How much can I borrow with a HELOC? It depends on your home's value, your current mortgage balance, your credit, and the lender's limits. A lender has to review your situation to tell you.

Pl

A HELOC gives you a line to draw from. A home equity loan gives you a lump sum. See how payments compare and which fits a remodel, a payoff, or a one-time expense.

HELOC vs home equity loan

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