HELOC vs. home equity loan: what's the difference?

If you’ve been paying a mortgage for years, you’ve probably built some equity in your home. Home equity is the current market value of your home, minus what you still owe on your mortgage. And you can put it to work if you want to consolidate high-interest unsecured debt, fund a renovation, or cover a large expense. 

Two of the most common options are a home equity loan and a home equity line of credit (HELOC). The difference between a HELOC and a home equity loan comes down to how you access the funds and how you repay them.

How a home equity loan works

A home equity loan is a second mortgage—a separate loan secured by your home, in addition to any existing mortgage you may already have. The lender reviews your application, typically confirms your home's value through an appraisal, and—if approved—sends the entire loan amount to you at closing in a single payment.

Repayment works like a standard mortgage. You make consistent monthly payments to cover both principal and interest, for the life of the loan. Because home equity loans carry a fixed interest rate, your rate is locked from the start, which may help you plan your monthly budget.

Your home serves as collateral for the loan. That means if you are unable to repay, your lender could foreclose on your home.

How a HELOC works

A home equity line of credit (HELOC) is a line of credit secured by your home. During the draw period, you borrow, repay, and borrow again up to your credit limit—similar to how a credit card works. Most lenders require interest-only payments on what you actually borrow during this time. 

Most lenders offer a variable interest rate during the draw period, which means your monthly payment could change as rates move. Achieve offers a fixed-rate HELOC , so ask about the rate structure on any HELOC you consider.

When the draw period ends, the repayment period begins. Repayment periods typically range from 10 to 20 years depending on your lender and the term you choose. This is when you make principal-plus-interest payments on the outstanding balance.

Key differences at a glance

What they have in common

HELOCs and home equity loans are similar in several important ways.

How much you may borrow with either option depends on your home equity. Lenders limit the amount you can borrow in two ways. One, every lender has a maximum amount they’ll lend. Two, you can only owe a certain percentage of your home’s value, and that includes your mortgage balance if you still have a mortgage. 

Both types of loans typically require a home appraisal—a professional assessment of a home's value—to confirm the property's current value before the lender issues the loan. Some lenders can do this using software. 

Both typically come with closing costs, which may include an application fee, origination fee, appraisal fee, and title search fee. Closing costs for either option could range from 2% to 5% of the loan amount, depending on location and loan size. You could pay closing costs up front, or let your lender deduct closing costs from your loan. 

Common uses for home equity

Homeowners often use home equity for:

• Resolve or reduce debt

• Home improvements and renovations

• Large expenses such as medical bills 

• Emergency expenses

How to choose between a HELOC and a home equity loan

Consider a home equity loan when you have a large, predictable expense you plan to cover right away. The fixed rate and consistent monthly payments may make it easier to plan ahead, and you do not have to track changing market conditions.

A HELOC could be a better fit if you want more flexible borrowing over time. You get access to the funds for several years. You only pay interest on what you borrow. During the draw period, which is five years with an Achieve Loan, you can borrow, repay, and borrow more as often as you like, up to your credit limit. 

Most HELOCs have a variable interest rate that could change from time to time, and make it harder to budget. A fixed-rate HELOC has an interest rate that never changes for the life of your loan. 

What to know before you apply

Before you apply for either product, review a few considerations.

• Lenders generally require that you retain at least 15% to 20% equity in your home after borrowing. That means your mortgage balance and your HELOC or home equity loan together can’t equal more than 80% to 85% of your home’s current market value.

• Both types of loan involve a credit review. A stronger credit profile typically results in better terms. 

• Closing costs apply to both, so factor those into your total cost comparison.