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With home values near all-time highs, many homeowners are sitting on significant equity. Two popular ways to access that equity are home equity loans and home equity lines of credit (HELOCs). While both use your home as collateral, they work very differently. Here's how to choose the right option for your needs.
Home Equity Loan vs HELOC: Key Differences
🏠 Home Equity Loan
A home equity loan is a lump-sum loan with a fixed interest rate and fixed monthly payments. You receive all the money upfront and repay it over a set term, typically 5-30 years.
Best for: One-time expenses with known costs (debt consolidation, major renovation)
💳 Home Equity Line of Credit (HELOC)
A HELOC works like a credit card secured by your home. You have a credit limit you can borrow from as needed during a "draw period" (typically 10 years). Interest rates are usually variable.
Best for: Ongoing expenses or projects with uncertain costs, emergency fund
Current Home Equity Rates (January 2024)
| Product | Average Rate | Rate Type | Typical Terms |
|---|---|---|---|
| Home Equity Loan | 8.50% - 10.50% | Fixed | 5-30 years |
| HELOC | 9.00% - 11.00% | Variable | 10-year draw, 20-year repayment |
When to Choose a Home Equity Loan
A home equity loan is the better choice when:
- You need a specific amount for a one-time expense
- You want predictable monthly payments
- You prefer the stability of a fixed interest rate
- You're consolidating high-interest debt
- Interest rates are expected to rise
Common Uses for Home Equity Loans
- Debt consolidation (paying off credit cards)
- Major home renovations with fixed costs
- Large medical expenses
- Wedding expenses
- Starting a business
When to Choose a HELOC
A HELOC makes more sense when:
- You need flexibility to borrow as needed
- Project costs are uncertain or spread over time
- You want an emergency backup fund
- You can handle variable interest rates
- You plan to pay off the balance quickly
Common Uses for HELOCs
- Ongoing home improvement projects
- Education expenses spread over years
- Emergency fund
- Investment opportunities
- Bridge financing (buying before selling)
Complete Side-by-Side Comparison
| Feature | Home Equity Loan | HELOC |
|---|---|---|
| How You Receive Money | Lump sum upfront | Draw as needed |
| Interest Rate | Fixed | Variable (usually) |
| Monthly Payments | Fixed | Variable |
| Repayment Period | 5-30 years | 10-year draw, 20-year repayment |
| Interest Charged On | Full loan amount | Only what you borrow |
| Closing Costs | 2-5% of loan | Minimal or $0 |
| Best For | Known, one-time expenses | Ongoing or uncertain expenses |
⚠️ Important: Your Home Is Collateral
Both home equity loans and HELOCs use your home as collateral. If you fail to make payments, the lender can foreclose on your home. Borrow only what you can afford to repay, and have a solid plan for repayment before borrowing.
Tax Implications
The Tax Cuts and Jobs Act of 2017 changed the deductibility of home equity interest:
- Interest is deductible if used to "buy, build, or substantially improve" your home
- Interest is NOT deductible if used for debt consolidation, education, or other personal expenses
- Total mortgage debt (including home equity) must be under $750,000 for full deductibility
Consult a tax professional for advice specific to your situation.
How Much Can You Borrow?
Most lenders allow you to borrow up to 80-85% of your home's value, minus your existing mortgage balance.
💡 Example Calculation
Home value: $400,000
Mortgage balance: $250,000
Maximum combined loans (85%): $340,000
Available equity: $90,000
Top Home Equity Lenders
| Lender | Product | Starting Rate | Max LTV |
|---|---|---|---|
| Discover | Home Equity Loan | 8.49% | 90% |
| Bank of America | HELOC | 8.74% | 85% |
| Wells Fargo | Both | 8.50% | 85% |
| Chase | HELOC | 8.99% | 80% |
Bottom Line
Choose a home equity loan for predictable, one-time expenses where you want fixed payments. Choose a HELOC for flexibility and ongoing needs where you're comfortable with variable rates. Either way, remember: your home is on the line, so borrow responsibly.