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

Your home equity could come in handy if you need to borrow money at a reasonable rate. Before you borrow, you have an important decision to make: Will you get a home equity line of credit (HELOC) or a home equity loan?

A HELOC lets you borrow, repay, and borrow again. You can do this as often as you like, up to your credit limit, for the first few years that you have the loan (this is called the draw period). A home equity loan provides a lump sum upfront, with fixed payments. The main differences are flexibility, and in some cases, a variable interest rate versus a fixed rate.

HELOC vs home equity loan at a glance

Here's a quick comparison of HELOCs and home equity loans:

HELOC and home equity loan requirements are similar. Homeowners typically need to maintain home equity of at least 15% to 20% of the home’s value. If you qualify for one of these loan types, you most likely could qualify for the other.

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

A HELOC lets you borrow, repay, and borrow more—up to your credit limit—as often as you like for the first few years (the draw period). A home equity loan is a one-time loan. HELOCs often have variable rates, while home equity loans typically have fixed rates. Both are secured by your home.

How a HELOC works

A HELOC is a revolving line of credit secured by your home. During the draw period, you can borrow, repay, and borrow more, up to your credit limit. The draw period often lasts five to 10 years, but this part of how a HELOC works varies by lender. Payments during this time could be interest-only or interest-and-principal depending on your loan terms.

After the draw period, you enter the repayment period. You can’t borrow from your HELOC any more during this period. The repayment period usually lasts five to 20 years. You'll usually need to make regular monthly payments that cover interest and principal for the rest of the loan term.

Many HELOCs have variable interest rates, meaning your rate can change over time, but some lenders offer fixed-rate HELOCs. Since fixed rates stay the same for the life of the loan, this type of HELOC tends to have more payment predictability during the repayment period.

How an Achieve Loans HELOC works

Achieve Loans offers a fixed-rate HELOC. Terms of 10, 15, 20, and 30 years are available, and each term starts with a five-year draw period. If approved, you receive the full loan amount in your initial draw. Over the rest of the draw period, you can pay down your HELOC and borrow more, up to your credit limit, as often as you like.

The fixed interest rate is a key difference between a HELOC through Achieve Loans and the variable-rate HELOCs many lenders offer. Achieve Loans also doesn’t charge a prepayment penalty, so you could pay off your HELOC balance early if you want.

Check your rate with no impact to your credit.

How a home equity loan works

A home equity loan is a one-time loan you repay over a set term, with fixed monthly payments. If approved, you get a single lump sum at closing. Most home equity loans have fixed rates, so your payments are the same every month from start to finish. You can only borrow once; if you want to borrow more later, you would need a new loan.

Payments for a home equity loan are typically amortized, meaning part of each payment goes to interest and part to the principal. Compared to interest-only payments with some HELOCs, you start paying down your principal right away with most home equity loans. Your monthly payments may initially be higher as a result, but you could save on interest overall.

Key differences between a HELOC and a home equity loan

Here are the differences that tend to matter most:

• Flexibility: A home equity loan provides a fixed amount one time, with no option to borrow more later. With a HELOC, you could borrow and repay multiple times during the draw period.

• Payment predictability: Monthly HELOC payments could change as your balance fluctuates or, in the case of a variable-rate HELOC, if the rate increases. Home equity loans generally have fixed, unchanging monthly payments during the repayment period.

• Interest rate structure: Home equity loans typically have fixed rates. Most HELOCs have variable rates.

A HELOC from Achieve Loans is like a blend of both. Unlike most, Achieve Loans HELOCs come with a fixed interest rate. This protects you from future interest rate fluctuations for the life of the loan. Like a traditional HELOC, it also includes a draw period, so you could borrow, repay, and borrow more up to your limit as your needs change. 

When a HELOC may make sense

A HELOC could be a good option if you want ongoing access to funds. As you repay your balance, you can borrow more, up to your credit limit, over and over during the draw period. It’s a convenient way to borrow money multiple times without going through multiple loan applications.

When a home equity loan may make sense

A home equity loan may be a better fit if a one-time loan will meet your needs. You might also decide on a home equity loan if you don’t need the option to borrow more money later.

HELOCs and home equity loans can both be good ways to borrow money, so deciding between them ultimately comes down to your borrowing needs. If you’re sure you only need a one-time loan, then a home equity loan could work well. If you think you may need to borrow again in the future or if you just want the flexibility to do so, a HELOC could give you that option.