Home Equity Loan vs. HELOC: Fixed Payments or Flexible Draws
Both let you borrow against your home's equity. One is a fixed lump-sum loan; the other is a variable credit line with an interest-only phase. Here is how the payments and total costs compare.
If you've built equity in your home, you can borrow against it in two main ways: a home equity loan or a home equity line of credit (HELOC). Both use your home as collateral. They behave very differently.
How each works
Home equity loan. You receive a lump sum upfront and repay it in fixed monthly payments at a fixed rate, typically over 5 to 30 years. Predictable, like a second mortgage.
HELOC. You get a credit line you can draw from as needed during a draw period, often around 10 years. During that time, many HELOCs require only interest payments on what you've borrowed. Then comes a repayment period, often around 20 years, when you repay principal and interest. Most HELOCs have variable rates tied to an index.
Comparing the payments
A hypothetical $50,000 borrowed:
- Home equity loan: 15-year term, fixed 8%.
- HELOC: full $50,000 drawn at the start, 8.5% variable rate, 10-year interest-only draw period, then 20-year repayment.
| Home equity loan | HELOC (rate stays 8.5%) | HELOC (rate rises to 10.5% at repayment) | |
|---|---|---|---|
| Monthly payment, years 1–10 | $477.83 | $354.17 (interest only) | $354.17 |
| Monthly payment after year 10 | $477.83 (until year 15) | $433.91 | $499.19 |
| Total interest | about $36,000 | about $96,600 | higher |
Show the numbers behind this chart
| Total interest | |
|---|---|
| Home equity loan (15 yr, 8%) | $36,009 |
| HELOC (10 yr interest-only + 20 yr repay, 8.5%) | $96,639 |
The HELOC's lower early payment comes from paying no principal for ten years. That stretches the debt out to 30 years and nearly triples the interest in this example, unless you pay more than the minimum.
Payment shock
When a HELOC's draw period ends, the payment can jump from interest-only to fully amortizing. If the rate has also risen, the jump is larger. In the table, the payment rises from about $354 to as much as $499, about 41% higher. Borrowers who've been paying only interest sometimes find this difficult.
When each tends to fit
A home equity loan tends to fit a single, known expense, like a specific renovation or consolidating a fixed amount of debt, when you want predictable payments.
A HELOC tends to fit expenses that arrive over time or are uncertain, such as a phased renovation, or as a standby reserve. You pay interest only on what you actually draw.
Risks for both
- Your home is collateral. Missing payments can lead to foreclosure. Turning unsecured debt like credit cards into debt secured by your home raises the stakes.
- Falling home values can leave you with less equity than expected, and lenders can freeze or reduce HELOC lines in some circumstances.
- Closing costs and fees may apply, including appraisal fees, annual fees, or early closure fees.
- Selling the home requires paying off both loans from the proceeds.
Questions to ask lenders
- Is the rate fixed or variable? What index and margin? Are there caps?
- How long are the draw and repayment periods?
- What is the minimum payment in each period?
- What fees apply at opening, annually, and at closing?
- Can part of a HELOC balance be converted to a fixed rate?
The takeaway
A home equity loan trades flexibility for certainty. A HELOC trades certainty for flexibility, and its low early payments can hide the true cost. Either way, you're borrowing against your home, so the decision deserves the same care as a mortgage.
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