HELOC vs Home Equity Loan: Which Is Right for You?

You've decided to tap your home equity. Smart move. But now comes the real question: HELOC or home equity loan?

Both let you borrow against your home. Both use your equity as collateral. But they work differently—and picking the wrong one can cost you thousands in unnecessary interest or leave you without the flexibility you need.

Here's the clear breakdown. By the end, you'll know which one fits your situation.

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The 30-Second Difference

Let's cut to it:

The bottom line: A HELOC gives you flexibility. A home equity loan gives you predictability. Which matters more to you?

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What's a HELOC? (Quick Refresher)

A HELOC is a revolving line of credit secured by your home—think of it as a credit card with much better rates because your house backs it up.

You get a credit limit (typically 80-85% of your home's value minus your mortgage balance). During the "draw period" (usually 5-10 years), you can borrow, repay, and borrow again as needed. You only pay interest on what you actually use.

Key characteristic: Flexibility. Borrow $20,000 now, another $15,000 next year, or nothing at all. Your choice.

→ Deep dive: What is a HELOC? Complete Guide

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What's a Home Equity Loan?

A home equity loan is exactly what it sounds like: a loan against your home equity. You get one lump sum, at one fixed rate, with one fixed payment every month until it's paid off.

It's literally a second mortgage. Same concept as your first mortgage—just sitting behind it in priority.

Key characteristic: Predictability. Same payment, same rate, same terms for 5, 10, 15, or even 30 years. No surprises.

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When to Choose a HELOC

Pick a HELOC if:

You don't know the exact amount you'll need

Renovations are notorious for this. That $30,000 kitchen remodel? Could be $45,000 once you open the walls. A HELOC lets you access more if you need it—without applying for a second loan.

You want funds available "just in case"

Some people open a HELOC and never use it. It sits there as a financial safety net—instant access to capital if something unexpected hits. You pay nothing until you borrow.

You'll need money over time

Paying tuition semester by semester? Funding a multi-phase renovation? Covering periodic business expenses? A HELOC lets you draw as you go instead of paying interest on money sitting in your checking account.

You want lower initial payments

During the draw period, most HELOCs allow interest-only payments. Your monthly obligation stays low while you have maximum flexibility.

You have a low mortgage rate you want to protect

Locked in at 3% back in 2021? A home equity line of credit lets you access equity without touching that rate. A cash-out refinance would mean giving it up for today's higher rates.

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When to Choose a Home Equity Loan

Pick a home equity loan if:

You know exactly what you need

Kitchen quote is $42,000. Contractor is ready. You know the number down to the dollar. Why pay for flexibility you won't use?

You want payment certainty

Some people sleep better knowing their payment won't change. A fixed-rate home equity loan means same amount, every month, for the life of the loan. No surprises, ever.

You're worried about rising rates

If you think rates are heading up (or just don't want to think about it), locking in today's rate protects you. HELOC rates move with the prime rate—what's 8% today could be 10% next year.

You want built-in discipline

A HELOC is easy to use. Too easy, for some people. If you'd be tempted to treat it like a credit card for everyday spending, a lump-sum loan removes the temptation.

You're consolidating debt with a payoff date in mind

Paying off credit cards? A home equity loan gives you a fixed timeline. You will be debt-free in 10 years (or 15, or 20). A HELOC can drag on indefinitely if you're not disciplined.

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Interest Rates: Variable vs. Fixed

Here's where they really diverge.

HELOC: Variable Rates

Most HELOCs tie their rate to the prime rate. When the Fed moves rates, your HELOC rate follows—usually within a billing cycle.

• Pro: Variable rates often start lower than fixed rates
• Con: Your payment can increase if rates rise
• Protection: Rate caps limit how high your rate can go (always ask about caps)

Home Equity Loan: Fixed Rates

Your rate is locked at closing. Period. Rates could double next year—yours stays the same.

• Pro: Complete payment predictability
• Con: Fixed rates are typically higher at origination than variable rates
• Protection: None needed—you're already protected

Current Reality

As of early 2026, the difference between starting HELOC rates and home equity loan rates is typically 0.5-1.5%. You're trading that small savings for rate risk.

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Real Cost Comparison

Let's make this concrete.

Scenario: You need to borrow $50,000.

Option A: Home Equity Loan

• Borrow: $50,000 at closing
• Rate: 8.5% fixed
• Term: 15 years
• Monthly payment: ~$492
• Total interest paid: ~$38,600

Outcome: Predictable. You know exactly what you'll pay, forever.

Option B: HELOC

• Draw $50,000 at closing
• Starting rate: 8.0% (variable)
• Interest-only payment (draw period): ~$333/month
• Full payment (repayment period): Depends on balance and rate at that time

Outcome: Lower payments now, but unknowns later. If rates rise to 10%, your repayment period costs more. If they drop to 6%, you save.

Option C: HELOC with Staged Draws

• Draw $25,000 at closing (what you need now)
• Draw another $25,000 in year 2 (when you actually need it)
• Total interest: Significantly less—you're not paying interest on money you're not using yet

This is the HELOC advantage. If you don't need all $50,000 on day one, why pay interest on it?

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The Hybrid Option: Fixed-Rate HELOC Draw

Here's something most people don't know: you don't have to choose.

Many HELOCs offer a fixed-rate lock option. You draw from your HELOC, then convert that portion to a fixed rate. The rest of your credit line stays variable.

Example:

• $75,000 HELOC
• Draw $30,000 and lock at 8.25% for 10 years (fixed rate HELOC portion)
• Keep $45,000 available at variable rate for future needs

Best of both worlds. Predictability where you want it, flexibility where you need it.

HonestCasa note: Not all lenders offer this. We connect you with 200+ lenders—including those with hybrid options.

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Closing Costs: The Hidden Factor

Both options come with closing costs, but they're not identical.

Home Equity Loan Closing Costs

• Appraisal: $300-600
• Origination fee: 0.5-1% of loan amount
• Title search and insurance: $500-1,000
• Recording fees: $50-200
• Typical total: $2,000-5,000

HELOC Closing Costs

• Appraisal: $300-600 (sometimes waived)
• Origination fee: Often lower or waived
• Annual fee: $50-100/year (varies by lender)
• Early closure fee: $300-500 if closed within 3 years
• Typical total: $500-2,500

Generally: HELOCs have lower upfront costs. But watch for annual fees and early closure penalties that can add up.

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What About Cash-Out Refinance?

Before you decide between HELOC and home equity loan, make sure neither is the real answer.

A cash-out refinance replaces your entire mortgage with a new, larger one—pocketing the difference. It's a third way to access equity.

Consider cash-out refi if:

• Your current mortgage rate is higher than today's rates (rare in 2026)
• You want to consolidate everything into one payment
• You need a large amount (100k+)

Stick with HELOC or home equity loan if:

• You have a low rate you want to keep (most people)
• You need a smaller amount
• You want separate finances from your primary mortgage

[→ Coming soon: HELOC vs. Cash-Out Refinance: The Complete Comparison]

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Quick Decision Checklist

Still not sure? Run through this:

Choose a HELOC if:

• You don't know the exact amount you'll need
• You want access to funds over time (not all at once)
• You're comfortable with payment variability
• You have a low existing mortgage rate to protect
• You want lower upfront costs
• You trust yourself not to overborrow

Choose a Home Equity Loan if:

• You know exactly how much you need
• You want the same payment every single month
• Rising interest rates make you nervous
• You want a clear payoff timeline
• You prefer "set it and forget it" simplicity
• You need spending guardrails

Checked more boxes on the left? HELOC.
More on the right? Home equity loan.
Split down the middle? Consider a HELOC with fixed-rate lock options.

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FAQs

Can I have both a HELOC and home equity loan?

Yes—if you have enough equity and can qualify. You'd have a first mortgage, plus two second liens. Some people do this for different purposes (one for ongoing flexibility, one for a fixed project). But it's complex, and most people don't need both.

Which has lower closing costs?

Usually HELOCs, sometimes significantly. But watch for annual fees and early closure penalties with HELOCs that can erode that advantage over time.

Which is faster to close?

Typically similar—30-45 days through traditional lenders. Through HonestCasa, both can close in as few as 7 days.

Can I convert a HELOC to a home equity loan?

Not directly. But you can refinance a HELOC into a home equity loan if you decide you want fixed payments. You'd close the HELOC and open a new loan. Same process as if you started fresh.

Which affects my credit score more?

Both show up as secured debt on your credit report. The impact is similar. The key factor is utilization—if you max out a HELOC, it can hurt your score more than a fully-drawn home equity loan because it looks like high credit utilization.

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The Bottom Line

HELOC = Flexibility. Draw what you need, when you need it. Lower starting costs. Variable rate risk.

Home Equity Loan = Predictability. One lump sum, fixed rate, same payment forever. Higher starting costs. Zero rate risk.

There's no universally "better" option. There's only the one that fits your situation.

Still not sure which makes sense for you? Start by seeing what you actually qualify for.

→ Check your eligibility — 2 minutes, no credit impact

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Have questions? Our team is here to help you figure out which option makes sense—no pressure, no pitch.