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HELOC loan

Home Equity Loans vs. HELOCs: What You Need to Know

There’s often debate around using home equity loans vs. HELOCs. This guide breaks it down the pros, cons, and best use cases for each.


[Updated: Jun 11, 2021 ] Nov 07, 2019 by Aly J. Yale
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Advantages of Home Equity Products Disadvantages of Home Equity Products
Easy to come by if you have significant equity Put your property at risk
Lower interest rates than other financial products Add a second monthly payment
Interest may be tax-deductible Come with closing costs and regular fees
Important note: HELOCs allow you to tap your home equity, but you don’t have to use the full amount offered to you by your lender. You can withdraw only the money you need as you need it.
HELOC Pros HELOC Cons
Can pull funds as needed Variable interest rates may rise over time
Only pay interest on what you use Inconsistent payments may be hard to budget for
Low, interest-only payments during withdrawal period Puts your home at risk
Interest may be tax-deductible May come with transaction fees for every withdrawal
Home Equity Loan Pros Home Equity Loan Cons
Offer a large, lump-sum payment Puts your home at risk
Fixed interest rates May mean paying too much in interest if you don’t estimate the funds you need accurately
Consistent, reliable payments that are easy to budget for Adds a second mortgage payment
No recurring or transaction fees
Interest may be tax-deductible
Loan Feature Home Equity Loans HELOCs
Interest rates Fixed Usually variable
Payment method Lump-sum Draw period
Tax-deductibility Only if used on home renovations Only if used on home renovations
Repayment term 5 to 30 years 10 to 30 years
Annual fees No Yes
Use Funds can be used on anything Funds can be used on anything
Closing Costs Typically higher than HELOCs Typically lower than home equity loans
If... Consider a...
...your income will likely increase over time HELOC
...you’re on a fixed or unpredictable income Home equity loan
...you need a low payment now, but can afford a larger one years down the line HELOC
...you’re not sure how much your expenses will be, and you need flexibility HELOC
...you have a predictable, one-time expense Home equity loan
...your expenses will be recurring or spread out over time HELOC
...you’re consolidating higher-interest debts and want a fixed, manageable payment plan Home equity loan
...you’re financially prepared for increasing rates and payments down the line HELOC
...you need a consistent, predictable payment across your entire loan term Home equity loan
...you can cover the required transaction and withdrawal fees HELOC
A quick note: Though refinances come with closing costs and other up-front fees, some lenders let you roll these into your loan balance and pay them off over time.