HELOC vs Home Equity Loan: Understanding Your Options

HELOC vs Home Equity Loan: Understanding Your Options

You have built equity in your home and now you want to put it to work. Maybe you are renovating a kitchen, consolidating high-interest debt, or covering college tuition. Two products let you borrow against your home equity: a HELOC and a home equity loan. They sound similar but work very differently.

Home Equity Loan: The Lump Sum

A home equity loan gives you a fixed amount of money all at once. You receive the full loan amount at closing, then repay it in equal monthly installments over a set term -- typically 5 to 30 years.

Key features:

• Fixed interest rate. Your rate and payment never change.
• Predictable payments. Same amount every month for the life of the loan.
• One-time disbursement. You get all the money upfront.
• Second lien position. This loan sits behind your primary mortgage.

Home equity loans work best when you need a specific amount for a defined purpose. Paying for a $50,000 kitchen renovation? A home equity loan gives you exactly that, and you know your payment from day one.

HELOC: The Revolving Credit Line

A home equity line of credit works more like a credit card secured by your house. The lender approves you for a maximum credit limit, and you draw from it as needed during the "draw period," which typically lasts 5 to 10 years.

Key features:

• Variable interest rate. Most HELOCs are tied to the prime rate and fluctuate with the market.
• Flexible borrowing. Draw what you need, when you need it. Pay it back and draw again.
• Interest-only payments during the draw period. You can pay just the interest on what you have borrowed (though paying principal is smart).
• Repayment period follows the draw period. Once the draw period ends (typically after 10 years), you enter a repayment period of 10 to 20 years where you pay back both principal and interest.

HELOCs excel when your expenses are ongoing or unpredictable. A multi-phase home renovation, recurring business expenses, or a financial safety net -- these are ideal HELOC use cases.

Rate Comparison

Home equity loan rates are typically 0.25% to 0.50% higher than HELOC introductory rates because you get the certainty of a fixed rate. However, HELOC rates are variable and can increase significantly if interest rates rise.

As of early 2026, home equity loan rates generally range from 7.5% to 9.5%, while HELOC rates range from 7.0% to 9.0%. Your actual rate depends on your credit score, LTV ratio, and lender.

Some lenders now offer fixed-rate HELOC options, where you can lock in a fixed rate on a portion of your balance. This gives you HELOC flexibility with some of the predictability of a home equity loan.

How Much Can You Borrow?

Both products are limited by your combined loan-to-value ratio (CLTV). Most lenders cap the total of your first mortgage plus your equity borrowing at 80% to 85% of your home's value. Some go up to 90%.

Here is an example. Your home is worth $500,000 and you owe $300,000 on your mortgage. With an 85% CLTV limit:

• Maximum total debt: $500,000 x 85% = $425,000
• Minus existing mortgage: $425,000 - $300,000 = $125,000
• Available to borrow: $125,000

Costs and Fees

Home equity loans typically have closing costs similar to a refinance: appraisal fee, origination fee, title search, and recording fees. Expect to pay 2% to 5% of the loan amount.

HELOCs often have lower upfront costs. Many lenders waive closing costs on HELOCs, though they may charge an annual fee ($50 to $100) and an early closure fee if you close the line within the first two to three years.

Tax Deductibility

Interest on both products may be tax-deductible, but only if you use the funds to "buy, build, or substantially improve" the home securing the loan. Using a HELOC to consolidate credit card debt? That interest is not deductible. Using it to add a bedroom? It likely is. Consult your tax advisor for specifics.

The Risk Factor

Both products use your home as collateral. If you cannot make payments, you risk foreclosure. This is the fundamental difference between home equity borrowing and unsecured debt like personal loans or credit cards.

HELOCs carry an additional risk: payment shock. When the draw period ends and you enter repayment, your payment can jump significantly -- especially if you were making interest-only payments and rates have risen. Borrowers who treat a HELOC like free money during the draw period often struggle during repayment.

Which One Should You Choose?

Choose a home equity loan if:

• You need a specific amount for a one-time expense
• You want predictable monthly payments
• You are concerned about rising interest rates
• You prefer the discipline of a structured repayment schedule

Choose a HELOC if:

• Your expenses are spread out over time
• You want flexibility to borrow only what you need
• You have the discipline to manage variable payments
• You want access to funds for emergencies without paying interest until you use them

SOMA can help you model both options against your current mortgage, equity, and financial goals to see which makes more sense for your situation.