HELOC vs Home Equity Loan: Which Is Better in 2026?

You've built equity in your home. Now you need cash. The question is: should you tap that equity with a HELOC or a home equity loan?

Both let you borrow against your home's value. Both use your house as collateral. But they work completely differently, and picking the wrong one can cost you thousands.

Here's what you need to know to make the right choice.

The Core Difference

A home equity loan gives you a lump sum upfront with a fixed interest rate. You start paying it back immediately with equal monthly payments over 5-30 years.

A HELOC ([Home Equity Line of Credit](/blog/best-heloc-lenders-2026)) works like a credit card secured by your home. You get a credit line you can draw from during a 5-10 year "draw period," then pay it back over 10-20 years. The interest rate is usually variable.

Think of it this way:

• Home equity loan = one-time loan
• HELOC = ongoing credit line

Rate Comparison: February 2026

As of February 2026, here's what you're looking at:

Home Equity Loan Rates:

• Average fixed rate: 8.25% - 9.75%
• Best rates (excellent credit): 7.85% - 8.50%
• Higher credit risk: 10.00% - 12.00%

HELOC Rates:

• Average variable rate: 8.75% - 10.25%
• Prime rate (Feb 2026): 8.50%
• Typical margin: 0.25% - 2.00% above prime

The Federal Reserve has kept rates elevated to manage inflation, which means both products are more expensive than they were in 2020-2021, but significantly better than the peak in late 2023.

Payment Structures

Home Equity Loan:

You borrow $50,000 at 8.50% for 15 years.

• Monthly payment: $491
• Total interest paid: $38,380
• Payment never changes

Simple. Predictable. Boring.

HELOC:

You have a $50,000 credit line at prime + 1% (currently 9.50%).

• Draw period (10 years): [Interest-only payments](/blog/heloc-draw-period-vs-repayment) on what you use
• If you draw $50,000 immediately: ~$396/month interest-only
• Repayment period (15 years): Principal + interest payments begin
• Rate adjusts when prime rate changes

Let's say you draw the full $50,000 immediately and prime rate stays at 8.50% for the entire time. After the 10-year draw period ends, your payment could jump to $598/month for the remaining 15 years.

But here's the catch: if prime rate increases to 10.50%, your payment during repayment could hit $694/month.

When a Home Equity Loan Makes Sense

Choose a home equity loan if:

1. You need all the money at once

Paying for a kitchen remodel? Medical bills? Debt consolidation? If you know the exact amount you need upfront, a lump sum makes sense.

2. You want payment certainty

Fixed rates mean your payment never changes. If you're budgeting carefully or worried about rate increases, this stability matters.

3. Rates are rising

When the Fed is hiking rates (like they did in 2022-2023), locking in a fixed rate protects you. If you think rates will go up, fix it now.

4. You prefer simplicity

One loan. One payment. No credit line to manage. Some people find this easier to handle psychologically.

When a HELOC Makes Sense

Choose a HELOC if:

1. You need flexibility

Renovating a house room-by-room? Don't know the final cost? Only borrow what you need, when you need it. You only pay interest on what you actually draw.

2. You have an emergency fund gap

A HELOC can act as a [backup emergency fund](/blog/heloc-for-emergency-fund). Keep the line open, don't draw on it unless necessary. Many HELOCs have no annual fee after the first year.

3. You expect income to increase

If you'll earn more in 3-5 years, interest-only payments during the draw period keep your current payments low. You can pay down principal aggressively later.

4. You think rates will fall

If you believe the Fed will cut rates (which they've signaled for late 2026), a variable rate could save you money. In 2024, people with HELOCs saved when prime dropped from 8.50% to 7.75%.

Real Cost Comparison

Let's run a real scenario. You need $75,000 for home improvements.

Scenario 1: Home Equity Loan

• Amount: $75,000
• Rate: 8.50% fixed
• Term: 15 years
• Monthly payment: $736
• Total interest: $57,570

Scenario 2: HELOC (Conservative Estimate)

• Credit line: $75,000 (draw full amount immediately)
• Current rate: 9.50% variable
• Draw period: 10 years (interest-only)
• Repayment period: 15 years
• Monthly payment during draw: $594
• Monthly payment during repayment (if rate stays at 9.50%): $898
• Total interest: ~$81,420

Scenario 3: HELOC (Optimistic Estimate)

• Same terms, but prime rate drops to 7.00% after year 3
• You pay $500/month extra toward principal during draw period
• Total interest: ~$42,000

The HELOC can save you money if rates drop and you're disciplined about payments. But if rates stay high and you only make minimum payments, the home equity loan wins.

Qualification Requirements

Both products have similar requirements, but with subtle differences.

Home Equity Loan:

• Credit score: 680+ (best rates require 740+)
• [Debt-to-income ratio](/blog/dti-ratio-explained): Under 43%
• Loan-to-value ratio: Up to 85% (some lenders go to 90%)
• Required equity: At least 15-20%

HELOC:

• Credit score: 680+ (best rates require 760+)
• Debt-to-income ratio: Under 43%
• Loan-to-value ratio: Up to 85%
• Required equity: At least 15-20%

HELOCs often have slightly stricter credit score requirements because of the variable rate risk. Lenders want to ensure you can handle payment increases.

Fees and Closing Costs

Home Equity Loan:

• Closing costs: 2-5% of loan amount ($1,500 - $3,750 on $75,000)
• Appraisal: $300 - $600
• Origination fee: 0-1%
• No annual fees

HELOC:

• Closing costs: $0 - $1,500 (many lenders waive this)
• Appraisal: $300 - $600 (sometimes waived)
• Annual fee: $0 - $100
• Inactivity fee: $50 - $100 if you don't use the line
• Early closure fee: $250 - $500 if you close within 2-3 years

The HELOC often has lower upfront costs, but watch for annual fees and early closure penalties.

Tax Deductibility (2026 Rules)

Both products may be tax-deductible, but only if you use the money to "buy, build, or substantially improve" the home that secures the loan.

• Maximum deductible debt: $750,000 (married filing jointly) or $375,000 (married filing separately)
• Must itemize deductions
• Home equity + mortgage can't exceed home's value

Using the money for debt consolidation, a car, or college tuition? Not deductible.

Always confirm with a tax professional. The rules changed in 2018 and many homeowners still think all [home equity borrowing](/blog/home-equity-loan-vs-heloc-2026) is deductible.

Risk Factors

Home Equity Loan Risks:

• Your payment is fixed even if rates drop
• You pay interest on the full amount immediately
• Harder to qualify for if you overestimate how much you need

HELOC Risks:

• Payment shock when draw period ends
• Rate increases can make payments unaffordable
• Some HELOCs have rate caps, some don't (check your terms)
• You might be tempted to overspend since it feels like available money

In 2008-2010, many homeowners with HELOCs faced payment shock when both their primary mortgage and HELOC adjusted upward simultaneously. Don't ignore this risk.

The Hybrid Approach

Some borrowers use both:

• Take a home equity loan for the known cost ($50,000 for a kitchen remodel)
• Open a small HELOC ($25,000) for unexpected overruns or future projects

This gives you the certainty of fixed payments for the bulk of your borrowing, plus flexibility for the unknown.

Which Should You Choose?

Here's the decision framework:

Choose a home equity loan if:

• You need a specific lump sum
• You want predictable payments
• You're risk-averse about rate changes
• You're paying off high-interest debt

Choose a HELOC if:

• You need flexible access to funds
• You're comfortable with payment variability
• You expect to pay it off quickly
• You think rates will decline

Skip both if:

• You have less than 20% equity
• Your credit score is below 680
• You're already struggling with your mortgage payment
• You're using it for discretionary spending

Better Alternatives?

Depending on your situation, you might consider:

• [Cash-out refinance](/blog/cash-out-refinance-guide): If current mortgage rates are close to your existing rate
• Personal loan: For smaller amounts under $25,000
• 0% credit card: For short-term needs under $15,000 you can pay off in 12-18 months

Each has trade-offs, but they're worth exploring before you put your home on the line.

Bottom Line

In February 2026, with rates still elevated but showing signs of decline, here's what makes sense:

• If you need certainty and have a specific project: Home equity loan
• If you value flexibility and think rates will fall: HELOC
• If you're not sure: Wait 3-6 months and see if the Fed cuts rates

Neither option is inherently better. It depends on your risk tolerance, how you'll use the money, and where you think interest rates are headed.

Your home is likely your biggest asset. Don't rush this decision. Run the numbers with at least three lenders, read the fine print, and make sure you can handle the payments even if things go wrong.

Related Articles

• HELOC vs Home Equity Loan: Key Differences Explained
• [[Home [Equity Explained](/blog/home-equity-explained)](/blog/what-is-home-equity): What It Is and How to Build It](/blog/home-equity-explained)
• Blended Family Home Planning: Merging Households and Managing Home Equity