When homeowners need access to cash, tapping into their home’s equity is one of the most effective ways to secure financing. There are two popular options for homeowners who want to take advantage of their hard-earned home equity: a home equity line of credit (HELOC) and a home equity loan.
HELOCs and home equity loans may both tap into your home equity for financing, but they are very different when it comes to interest rates, repayment schedules and borrowing terms.
Curious about which is the right choice for you? Understanding the differences between these two options can help you make an informed decision that aligns with your financial goals.
We’ll explore both options in detail, compare their key features and provide practical guidance on how to determine which choice best fits your situation.
What is a HELOC?
A HELOC is a revolving credit line that allows you to borrow against the equity in your home. This type of financing operates much like a credit card, where you can borrow funds as needed, up to a certain limit, and pay interest only on the amount you borrow.
Key Features of a HELOC
- Revolving credit line: Unlike a traditional loan, a HELOC provides a revolving credit line, which means you can borrow, repay and borrow again during the draw period.
- Variable interest rate: Most HELOCs come with a variable interest rate that fluctuates over time based on market conditions.
- Draw period vs. repayment period: A HELOC typically has two distinct phases— the draw period and the repayment period. During the draw period, you can borrow from the line of credit. During the repayment period, you repay both the principal and interest.
- Flexible borrowing: HELOCs offer flexibility to borrow what you need, when you need it.
Who should consider a HELOC?
A HELOC is a great choice for homeowners who may need access to funds over time, like for home renovations or assistance with college tuition. It’s a flexible option for those who don’t mind changes in interest rates and are okay with adjusting their monthly payments as needed.
What is a home equity loan?
Often referred to as a second mortgage, a home equity loan allows you to borrow a lump sum of money by leveraging the equity in your home. This type of loan is repaid over a set term with fixed monthly payments and a fixed interest rate.
Key Features of a Home Equity Loan
- Lump-sum payout: You receive the full loan amount upfront in a single lump sum.
- Fixed interest rate: Unlike a HELOC, a home equity loan typically has a fixed interest rate, providing you with predictable monthly payments.
- Set repayment schedule: You’ll repay the loan in equal monthly installments over a predetermined term, often ranging from five to 30 years.
Who should consider a home equity loan?
A home equity loan is perfect for homeowners who need a large amount of money for something like consolidating debt or tackling a major home project. It’s a great choice if you prefer the peace of mind that comes with fixed payments and a steady interest rate.
Key Differences Between HELOC and a Home Equity Loan
Understanding the key differences between a HELOC and a home equity loan is crucial when deciding which option best meets your needs.
Structure
A HELOC is a revolving line of credit, allowing you to borrow and repay multiple times during the draw period. A home equity loan, on the other hand, provides a one-time lump-sum payout.
Interest Rates
With a HELOC, the interest rate is typically variable, meaning it can fluctuate over time. A home equity loan comes with a fixed interest rate, which can provide stability and predictability in your payments.
Payment Terms
HELOC payments are flexible during the draw period, as you only pay interest on the amount borrowed. During the repayment period, payments become more structured. In contrast, home equity loans have fixed monthly payments from the start, making it easier to budget.
Risk Tolerance
If you’re comfortable with fluctuating payments and interest rates, a HELOC might be a good fit. If you prefer the stability of fixed payments, a home equity loan is likely a better option.
Pros and Cons of HELOCs and Home Equity Loans
Both HELOCs and home equity loans offer distinct advantages and disadvantages. Weighing these pros and cons can help you determine which option best suits your financial situation.
HELOC Pros
- Flexible access to funds: You can borrow as much or as little as needed, up to your credit limit, during the draw period.
- Interest paid only on what’s borrowed: You only pay interest on the amount you borrow, not the total credit limit.
- Potentially lower initial interest rates: HELOCs often start with lower interest rates than home equity loans, making them appealing for short-term needs.
HELOC Cons
- Risk of over-borrowing: As a revolving line of credit, HELOCs are similar in structure to a credit card. This can present difficulties for people who struggle to control their spending, leading to the risk of borrowing more than they can comfortably repay.
Home Equity Loan Pros
- Fixed interest rate and consistent payments: A fixed interest rate provides stability, making it easier to plan and budget.
- Ideal for large, specific projects: If you need a substantial amount of money for a one-time project, a home equity loan can be an ideal solution.
- Easier to budget: With fixed payments, you’ll know exactly how much to pay each month, which helps with long-term financial planning.
Home Equity Loan Cons
- Minimum equity requirement: Typically, a lender requires at least 20% equity in your home before being eligible for a home equity loan. This can be an issue for new homeowners or people with a smaller down payment.
Key Considerations for HELOCs vs. Home Equity Loans
Deciding between a HELOC and a home equity loan depends on several factors. Here are some things to consider before you make a decision.
Consider your financial goals.
Are you planning to use the funds for ongoing expenses or a single large purchase? If you have ongoing expenses like home renovations or tuition payments, a HELOC might be a better fit. For a one-time expense, such as debt consolidation or a major home improvement, a home equity loan may make more sense.
Know how you plan to use the funds.
A HELOC is ideal for projects where the total cost is uncertain or spread out over time. For example, if you’re making renovations that will take several months to complete, a HELOC allows you to borrow only as needed. On the other hand, if you have a specific project with a known cost, like installing a new roof, a home equity loan can provide the lump sum you need.
Decide on your risk tolerance for interest rate changes.
A HELOC comes with a variable interest rate, meaning your payments could fluctuate. If you’re comfortable with this uncertainty, a HELOC may be right for you. However, if you prefer the security of fixed payments, a home equity loan is likely a better option.
Determine your preferred payment structure.
If you prefer flexibility in how much you borrow and when, a HELOC offers the freedom to access funds as needed. If you want a clear, predictable payment structure, a home equity loan is the way to go.
Take advantage of our limited-time promotion!
If you believe that a HELOC is the right choice for you, now through Nov. 30, 2025, you can take advantage of no closing costs* and a locked-in rate for all of 20251 on HELOCs! Visit our promotion page for more details.
Both HELOCs and home equity loans offer valuable ways to access the equity in your home. Whether you choose the flexibility of a HELOC or the predictability of a home equity loan depends on your unique financial situation.
At Apple Federal Credit Union, we offer both HELOCs and Home Equity Loans to help you reach your financial goals. If you’re unsure about which option is right for you, our team of financial experts is here to help.Schedule a video appointment or visit a branch to learn more!
*Pay no closing costs on any new HELOC when you apply 12/01/2024-11/30/2025. Your settlement statement at closing will reflect closing costs; however, you will receive a credit equal to the amount of the closing costs. To qualify for the promotion, the member must use the title company selected by Apple FCU. Member must still pay the appraisal fee if a full appraisal is required. Members who increase their existing HELOC by applying for a new HELOC will also qualify, with a minimum increase of $5,000. No closing costs offer is valid for one-time use during any 12-month period. Apple FCU can finance equities for property within Virginia, Maryland, West Virginia, North Carolina and the District of Columbia. The HMDA data about our residential mortgage lending is available for review. The data shows geographic distribution of Loans and applications; ethnicity, race, sex, and income of applicants and borrowers; and information about loan approvals and denials. Inquire at 703-788-4800 regarding the locations where HMDA data may be inspected. Applicable APR; if the APR is variable, a statement that the rate can change and the maximum APR under the plan; any applicable loan fees; and a statement that property insurance is required, if applicable. 1APR = Annual Percentage Rate. Offer ONLY available for NEW HELOCs closed between 12/01/2024 and 11/30/2025. Advances made between 12/01/2024 and 11/30/2025 will be locked at the guaranteed rate until 12/31/2025. Your guaranteed rate will be adjusted on 01/01/2026, and the new rate will be applied to the remaining balance. Rate advertised is a variable rate. On 01/01/2026, the APR will be adjusted to either your floor rate or the Prime Rate as published in the Wall Street Journal (whichever is higher) on 12/21/2025 plus or minus your current margin on the remaining balance and will be subject to change each quarter thereafter as stipulated by your original terms and conditions. Maximum interest rate 18.00% APR. Advance amounts must be within your existing credit limit. Advances in excess of your current credit limit will not be honored and may be subject to additional fees. If you had an outstanding balance of $10,000 during the Draw Period, the minimum monthly payment at the maximum APR of 18 % would be $150.00. Maximum loan amount is $250,000, with a maximum combined loan to value ratio of 90%.
