Home Equity Loan vs. HELOC: Which Is Right for Your Situation?

Turning Home Equity Into Cash

If you own a home and have equity — the difference between what your home is worth and what you owe on your mortgage — you can borrow against that equity at rates significantly lower than personal loans or credit cards.

Two main products give you access to home equity: home equity loans and home equity lines of credit (HELOCs).

What Is Home Equity?

Home equity = Current market value − Outstanding mortgage balance

If your home is worth $450,000 and you owe $270,000 on your mortgage, you have $180,000 in equity. Lenders typically let you borrow up to 80–85% of your home's value (combined first mortgage + equity product).

Max borrowable:

• $450,000 × 85% = $382,500 combined loan limit
• $382,500 − $270,000 (existing mortgage) = $112,500 available

Home Equity Loan: How It Works

A home equity loan is an installment loan — you receive a lump sum at a fixed interest rate and repay it in equal monthly installments over 5–30 years.

Think of it as: A second mortgage with fixed terms.

Best for:

• Large, one-time expenses with a known cost (major renovation, debt consolidation, medical bills)
• Borrowers who want payment certainty
• Situations where you want all the money upfront

2026 typical rates: 7–9% fixed APR (vs. 20–29% for unsecured personal loans or credit cards)

HELOC: How It Works

A HELOC (Home Equity Line of Credit) is a revolving line of credit — similar to a credit card, secured by your home.

Structure:

• Draw period (typically 10 years): Borrow up to your limit, pay interest-only or small payments, repay and re-borrow as needed
• Repayment period (typically 10–20 years): Line closes, you repay the outstanding balance in full installments

Best for:

• Projects with uncertain or phased costs (ongoing renovations, starting a business)
• Access to funds over time as needed
• Borrowers who want flexibility without immediately paying interest on an unused balance

2026 typical rates: Variable, currently 8–10% (tied to the prime rate)

Side-by-Side Comparison

When to Use Each

Home Equity Loan

• Debt consolidation: Replace $40,000 of 24% credit card debt with a 8% home equity loan — saves thousands in interest and simplifies payments
• Specific home improvement: Kitchen remodel with a firm $60,000 quote
• Medical expenses: Large, known bill
• Education costs: Defined tuition payment

HELOC

• Phased renovation: Adding an addition over 18 months — draw funds as needed, not upfront
• Business startup costs: Access capital as expenses arise
• Emergency fund supplement: Have access to a credit line for unexpected large expenses without paying interest until you need it
• Investment property expenses: Ongoing maintenance and improvement costs

The Risk: Your Home Is Collateral

Unlike a credit card or personal loan, both home equity products put your home at risk. If you cannot repay, the lender can foreclose.

This makes the rate lower — the lender has collateral — but the stakes higher. Use home equity borrowing for productive purposes (increasing home value, consolidating high-interest debt, investing in education or business) rather than discretionary spending.

Interest Deductibility

Interest on home equity loans and HELOCs is tax-deductible if the funds are used to "buy, build, or substantially improve" your home. If you use the funds for debt consolidation, medical bills, or other non-home purposes, the interest is generally not deductible.

Consult a tax professional for your specific situation.

See if a home equity product fits your budget →

Frequently Asked Questions

How much equity do I need to qualify? Most lenders require at least 15–20% equity remaining after the loan (so if your home is worth $400,000, you need to keep $60,000–$80,000 in equity untouched). Combined LTV (loan-to-value) of 80–85% is the typical maximum.

Does a HELOC affect my credit score? Opening a HELOC creates a hard inquiry and new account, which causes a minor temporary score dip. Using a large portion of the HELOC limit may affect credit utilization depending on how it is reported.

Can I get a HELOC with less-than-perfect credit? Some lenders approve HELOCs for credit scores in the 620–680 range, though rates will be higher and limits lower. Most competitive rates require 720+.