Home equity is one of the most powerful financial tools for homeowners — but the way you access it matters enormously. A home equity loan gives you a fixed lump sum with a predictable payment. A HELOC gives you a revolving credit line you can draw from as needed, paying interest only on what you use. The difference in total cost between the two, on the same dollar amount, can reach tens of thousands of dollars over a decade — in either direction, depending on rate movements and how much of the line you actually draw.
How Each Product Works
A home equity loan closes like a mortgage: you receive the full amount at settlement, a fixed interest rate is set, and you begin making equal monthly payments immediately. The term is typically 5 to 20 years. The rate never changes. You owe principal and interest from day one.
A HELOC (Home Equity Line of Credit) functions more like a secured credit card. The lender approves a credit limit, and you draw against it as needed using checks or a linked card, anytime during the draw period (usually 10 years). During the draw period, most HELOCs require only interest payments on the outstanding balance. After the draw period ends, the remaining balance converts to a fixed amortizing loan for the repayment period (usually 20 years).
Rate Structure: Fixed vs Variable
This is the most consequential difference for most borrowers. Home equity loans carry a fixed rate — typically prime + 1%–3.5%, locked at closing. HELOCs carry a variable rate that adjusts monthly or quarterly with the prime rate. In 2026, with the prime rate around 7.50%, HELOCs open at approximately 7.75%–9.50%; home equity loans run 8.25%–9.75%.
The HELOC starts cheaper on paper — but that 0.25%–0.5% initial spread evaporates if the prime rate rises even modestly. In 2022–2023, the Fed raised rates by 525 basis points in 18 months. Homeowners who opened HELOCs at 4% in 2021 saw payments double within 18 months. Rate risk is real and should be modeled for your specific draw amount.
Real Cost Comparison: $80,000 Over 10 Years
| Scenario | Monthly Payment | Total Interest | Total Cost |
|---|---|---|---|
| Home equity loan, 8.75%, 10 yr | $1,001 | $40,124 | $120,124 |
| HELOC at 8.25% flat (draw + repay) | $550 draw / $682 repay | $49,000 est. | $129,000 est. |
| HELOC if prime rises 1.5% over 5 years | Up to $758 repay | $57,000 est. | $137,000 est. |
| HELOC: only draw $40,000 (half limit) | $275 draw period | $24,500 est. | $64,500 est. |
Estimates based on 10-year draw, 20-year repayment for HELOC. Home equity loan assumes 10-year term. Rates as of mid-2026.
When a Home Equity Loan Is Better
- You know the exact amount needed. A kitchen renovation with a firm contractor quote. A debt consolidation with a known balance. Any expense where the total is fixed.
- You want rate certainty. If the unpredictability of a variable payment would stress your budget, the 0.25%–0.5% premium for a fixed rate is almost always worth it.
- You plan to spend the money quickly. HELOCs charge interest on the drawn balance — if you'll draw the full amount immediately and hold it, the HELOC's interest-only period buys little advantage while adding rate risk.
When a HELOC Is Better
- You have ongoing or uncertain costs. A staged home renovation where you draw funds as work is completed. An emergency fund you may never fully use. College tuition paid each semester.
- You'll only draw part of the limit. The biggest HELOC advantage: you pay interest only on what you draw. If you're approved for $100,000 but only use $35,000, your interest cost is 35% of what a home equity loan on $100,000 would charge.
- You expect rates to fall. If the Fed is in a rate-cutting cycle, a variable-rate HELOC benefits automatically. Home equity loan rates are fixed — you'd need to refinance to capture rate drops.
Tax Deductibility in 2026
The Tax Cuts and Jobs Act of 2017 changed the deductibility rules for home equity products. Interest is deductible only when the proceeds are used to buy, build, or substantially improve the home that secures the loan. The common use cases that are not deductible: debt consolidation, medical expenses, vacations, purchasing a car.
If deductibility matters for your decision, document the use of funds carefully. Keep invoices, contractor receipts, and a clear paper trail linking the loan proceeds to home improvement expenditures. The deduction limit (combined mortgage debt) is $750,000 for married filing jointly for loans originated after December 16, 2017.
Qualifying for Each Product
Both products use your home as collateral and follow similar qualification standards. Most lenders require: credit score 680+ (700+ for best rates), combined LTV ≤ 80%–85%, debt-to-income ratio ≤ 43%–45%, and 2+ years of stable income documentation. The equity you have available is: home value × 0.85 − first mortgage balance = maximum home equity product amount for most lenders.
Before tapping equity, verify that your PMI (if any) has been removed — that monthly savings may reduce how much you need to borrow. The PMI removal guide explains all four cancellation paths. And if your first mortgage itself is above the conforming limit, your equity options may be priced differently — the jumbo loan guide covers how high-balance mortgages affect your rate environment.