What is the difference between a home equity loan and a HELOC?

A home equity loan gives you a lump sum with a fixed interest rate and fixed monthly payments. A HELOC is a revolving line of credit with a variable rate — you draw funds as needed during a draw period and only pay interest on what you use.

How much equity do I need for a home equity loan?

Most lenders require at least 15-20% equity remaining after the loan. With a combined loan-to-value (CLTV) limit of 85%, you need at least 15% equity. On a $400,000 home, you would need at least $60,000 in equity.

Are home equity loan interest rates higher than mortgage rates?

Yes, home equity loan and HELOC rates are typically 1-2% higher than first mortgage rates because they are subordinate to your primary mortgage, making them riskier for lenders.

Is home equity loan interest tax deductible?

Home equity interest is tax deductible if the funds are used for home improvements (buying, building, or substantially improving the home securing the loan). Interest on funds used for other purposes like debt consolidation or personal expenses is not deductible.

Home Equity Loans & HELOCs: Access Your Home's Value

Home equity loans and HELOCs let you borrow against your home's value without refinancing your first mortgage. Learn the differences, rates, and when each makes sense.

Home Equity Loan vs. HELOC

Both let you borrow against your home equity, but they work very differently. A home equity loan gives you a lump sum at a fixed rate. A HELOC is a revolving line of credit with a variable rate. Here is a detailed comparison:

Feature	Home Equity Loan	HELOC
How You Get Funds	Lump sum at closing	Draw as needed (like a credit card)
Interest Rate	Fixed	Variable (often tied to Prime)
Monthly Payment	Fixed, predictable	Changes with balance and rate
Draw Period	N/A	5-10 years
Repayment Period	5-30 years	10-20 years after draw period
Max LTV	80-85% CLTV	80-85% CLTV
Interest Deductible?	If used for home improvements	If used for home improvements
Best For	Known, one-time expenses	Ongoing or uncertain expenses

How Much Can You Borrow?

85%

Max Combined LTV

620+

Min Credit Score

43%

Max DTI Ratio

15+ yrs

Min Ownership (Typical)

Your borrowing limit is based on Combined Loan-to-Value (CLTV). If your home is worth $500,000 and you owe $300,000, your available equity at 85% CLTV is: ($500K x 85%) - $300K = $125,000.

When to Choose Each Option

Home Equity Loan

Best for one-time expenses with known costs: major renovation, debt consolidation, or large purchase. Fixed rate gives payment certainty. Good when you want to borrow a specific amount.

HELOC

Best for ongoing expenses or uncertain costs: phased renovations, emergency fund access, or college tuition payments over time. Only pay interest on what you draw. Good when you need flexibility.

Cash-Out Refinance

Best when you also want to change your first mortgage rate or term. See our cash-out refinance guide for details. Not ideal if your current rate is already low.

Home Equity Risks to Understand

Important Considerations

Your home is collateral — failure to repay can result in foreclosure, just like your first mortgage
HELOC rate risk — variable rates can increase significantly; a 3% rate today could be 8% in 3 years
Closing costs apply — expect $2,000-$5,000 in closing costs for home equity loans (some lenders waive them)
Reduces your equity cushion — if home values decline, you could owe more than your home is worth
HELOC payment shock — when the draw period ends, payments increase because you start repaying principal

Use our mortgage calculator to estimate equity loan payments, or check today's rates. Explore refinancing as an alternative to access equity.

Home Equity Loan vs HELOC Explained