HELOC vs. Home Equity Loan: Which Unlocks Your Equity Better?
Both let you borrow against your house at lower rates than credit cards. The difference comes down to whether you need a lump sum or a flexible line.
The key difference in one sentence
A home equity loan is a one-time lump sum at a fixed rate over a fixed term (like a second mortgage). A HELOC is a revolving credit line — borrow what you need, when you need it, like a card secured by your house.
When a home equity loan wins
- Known, one-time expense — a $40,000 kitchen, a single roof replacement.
- You want a fixed rate in a rising-rate environment.
- You need budgeting predictability — same payment every month for 10–20 years.
When a HELOC wins
- Ongoing or unknown future needs — multiple home repairs over 5 years, in-home care expenses.
- Emergency reserve — open it before you need it, draw only if necessary.
- You can pay it down and re-borrow — useful if expenses come in waves.
Rates in 2026
- Home equity loans: 7.5–9.0% fixed.
- HELOCs: 8.0–10.0% variable, tied to the prime rate.
When the Fed cuts rates, HELOC rates drop with it. When the Fed raises, HELOCs go up. Home equity loans lock today's rate either way.
Tax deductibility
Interest on both is deductible only when used to buy, build, or substantially improve the home that secures the loan. Using either for a car or vacation? Not deductible.
How much you can borrow
Most lenders allow you to borrow up to 80–85% of your home's value, minus what you still owe on the first mortgage.
Example: $500,000 home, $200,000 first mortgage.
- 85% of value: $425,000
- Minus first mortgage: $225,000 available
The "open it before you need it" trick
A HELOC opened before retirement (when you still have W-2 income and easy approval) gives you a safety net you may never use but always have. Annual fees are usually $0–$75. Many retirees consider this the cheapest insurance policy in personal finance.
Risks to weigh
- Both are secured by your house. Default = foreclosure.
- HELOC rates can rise quickly. A 2% rate jump on a $100k balance is $2,000 more per year in interest.
- "Draw period" ends. Most HELOCs allow draws for 10 years, then convert to a 10-20 year repayment period. Plan for that transition.
Bottom line
For a known project, a home equity loan with a fixed rate is simpler. For flexibility and as an emergency tool, a HELOC is better. Many retirees use both — a HELOC opened as backup, and a home equity loan when a big single project comes up.