What’s the Difference Between a HELOC and a Home Equity Loan?
HELOCs and home equity loans are two ways to access the cash tied up in your home. Let’s explore what makes them different—and which one is right for you.
Bottom Line Up Front
- A HELOC often has a variable interest rate, letting you draw funds as needed over time.
- A home equity loan often provides a one-time lump sum with fixed monthly payments, though some loans offer variable rates.
- Both use your home as collateral and typically require at least 15-20% equity in the property.
Time to Read
7 minutes
March 12, 2025
Your home is more than just a place to live—it’s also a valuable financial asset. As you make mortgage payments and your home’s value grows, you build equity that you could tap into when you need it. Two popular ways to access this equity are a home equity line of credit (HELOC) and a home equity loan.
While both a HELOC and home equity loan let you borrow against your home’s value, they work quite differently. Whether you’re planning a major home renovation, consolidating debt or covering unexpected expenses, understanding the key differences between these 2 options may help you choose the best method for tapping into the money you’ve built up in your home.
The ins and outs of home equity
Before we dive into the specific differences between a HELOC and a home equity loan, let’s start with something they share: Both let you borrow against your home’s equity.
Think of equity as the difference between what your home is worth today and what you owe on your mortgage. Homeowners typically begin to build equity by making a down payment when purchasing their property.
For instance, say you take out your first mortgage and put down $50,000 on a $400,000 home. You’ll start with 12.5% equity, which may increase over time. After years of on-time mortgage payments, you might have $100,000 invested in your home—which amounts to 25% equity.
Both a HELOC and a home equity loan give you access to that money.
What is a home equity line of credit (HELOC)?
A HELOC works like a credit card that’s secured by your home. You’re approved for a credit limit and can borrow money when you need it during what’s called the “draw period”—typically 10 years. During this time, you can withdraw money, pay it back and borrow again, up to your credit limit. You’ll only pay interest on the amount you borrow, not your total credit limit.
Variable interest rates are very common in HELOCs, which means your rate can change over time based on market conditions. Most HELOCs start with interest-only payments during the draw period, which keeps your initial payments lower. After the draw period ends, you’ll enter the repayment period where you’ll pay back both principal and interest.
What is a home equity loan?
With a home equity loan, you typically receive a lump sum of money upfront and pay it back over a set period with fixed monthly payments. Think of it as a second mortgage. When the interest rate is fixed, your monthly payments stay the same throughout the life of the loan.
This predictability could make a home equity loan especially helpful when you know exactly how much money you need for a specific purpose, like a one-time home improvement project or debt consolidation. You’ll start paying both principal and interest right away, but you’ll know exactly what your monthly payment will be from start to finish.
HELOC vs. home equity loan: How do they work?
Let’s look at an example to help you understand how each option works. Imagine you have $100,000 in home equity and want to access $50,000 in equity for home improvements. Here’s how each option plays out.
Using a HELOC
A HELOC could offer flexibility with your borrowing. You might get approved for a $50,000 credit line, but you don’t have to use it all at once. For instance, you could start with $10,000 for new windows, then later use another $15,000 for a kitchen remodel.
Your payments are based only on the amount you’ve borrowed. Since HELOCs typically have variable rates, your interest rate and payments might change as market rates shift. During the draw period, you can continue to borrow more as you pay down your balance, giving you ongoing access to funds.
Using a home equity loan
A home equity loan may provide more certainty and structure with a fixed interest rate. You’d receive the full $50,000 upfront with a locked-in rate, meaning your monthly home equity loan payments stay the same throughout the loan term. You’ll start paying back both principal and interest right away on a set schedule. While you can’t borrow more without applying for a new loan, you’ll always know how long it will take to pay off your existing loan—and what your payments will be.
Smart Money Tip
Want to estimate your potential payments? Try our home equity payment calculator to help plan your budget.
Getting approved: What you need to know
The home equity approval process is similar for both HELOCs and home equity loans. You’ll typically need to have your home appraised to determine its current value. Lenders will look at your credit score, usually requiring a minimum of 620 or higher. They’ll also review your debt-to-income ratio to make sure you can comfortably manage the payments. What’s more, most lenders require you to have at least 15-20% equity in your home to qualify.
Pros and cons: HELOC vs. home equity loan
Wondering which home equity option is the best for your situation? Keep in mind that both options use your home as collateral. However, each comes with unique advantages and features. Here are some factors you should consider.
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Choosing between a HELOC and a home equity loan
The choice between a HELOC and a home equity loan often comes down to your reason for borrowing and your personal financial situation. Before deciding, consider these key factors:
- How much equity do you have available? Most lenders require 15-20% equity in your home after borrowing.
- What is your credit score and debt-to-income ratio? These factors affect both approval odds and interest rate.
- How do you plan to use the funds? Ask yourself whether you need the money all at once or prefer to borrow over time.
- What is your comfort with variable vs. fixed rates? Consider how important payment predictability is to you.
- What is your capacity to make payments? Look at the impact of fixed payments from the start compared to lower initial payments.
As you’re asking yourself these questions, begin to look at the specific reason for borrowing against your home equity. Understanding which situations are best suited for each option can help you make the right decision and set your expectations for borrowing.
When to choose a HELOC
It might not be obvious when choosing a HELOC is the preferred option. Here are some scenarios that may help you decide:
- You’re planning a room-by-room home renovation. Access funds as needed for each phase of your project, from updating the kitchen to remodeling bathrooms, while only paying interest on what you use.
- You want a safety net for unexpected costs. Keep a credit line available for unforeseen or emergency expenses without paying interest until you actually need the money.
- You want flexibility. Use the line of credit to borrow funds over time whenever you need it.
- You’re unsure of total project costs. Access additional funds if renovation expenses run higher than expected without applying for a new loan.
When to choose a home equity loan
There are several situations where a home equity loan may make more sense than a HELOC. A home equity loan might be your best choice if:
- You’re consolidating high-interest debt. Lock in a fixed rate on a specific amount to pay off credit cards or other debts with a clear repayment schedule.
- You’re funding a one-time home improvement. Finance a major project with known costs—like a new roof or pool installation—with predictable monthly payments.
- You prefer structured payments. Know exactly how much you’ll pay each month with a fixed interest rate and set repayment timeline.
- You want to avoid the temptation of revolving credit. Receive a lump sum without the ability to borrow more, helping you stick to your budget.
Smart Money Tip
Want to learn more about the different ways you can use your home’s equity? Check out our guide on smart ways to use your home equity.
Navy Federal Credit Union can help you access your home equity
Your home equity may be a valuable financial asset, and choosing how to access it is an important decision. Whether you decide on the flexibility of a HELOC or the predictability of a home equity loan, Navy Federal is committed to helping you make the most of your home’s value.
Want to learn more? Explore our home equity resources to calculate possible payments—from reserves to closing costs—and find detailed information about our home equity options. If you have questions along the way, our experienced loan officers are here to guide you through every step of the process. We’re ready to help put your home’s equity to work for you.
Disclosures
This content is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.