HELOC vs. Home Equity Loan: What's the Difference?

Short answer: HELOC vs. home equity loan comes down to how you borrow. A home equity loan gives you a specific amount in one lump sum, usually at a fixed rate with equal monthly payments. A HELOC (home equity line of credit) lets you borrow repeatedly up to a limit, usually at a variable rate, so your payments can change. Both are secured by your home, and if you can't repay, you could lose it.

What Is the Difference Between a HELOC and a Home Equity Loan?

The Consumer Financial Protection Bureau (CFPB) defines a home equity loan as "a specific amount of money borrowed against the equity of your home," and a HELOC as "a line of credit, like a credit card, except you are borrowing against the equity of your home." Your equity is the value of your home minus what you owe on your mortgage. If you already have a mortgage, the CFPB says either one would be considered a second mortgage that you pay on top of the first.

	Home equity loan	HELOC
How you get the money	One lump sum up front	Draw as needed, up to a credit limit
Interest rate	Typically a fixed APR (FTC); the CFPB notes it may be fixed or adjustable	Usually variable
Payments	Equal monthly payments over a fixed term (FTC)	Based on your balance; may be interest-only during the draw period
Borrowing again	No; it's a one-time lump sum	Yes, during the draw period, as you repay
Collateral	Your home	Your home
Main risk	Losing your home if you can't repay	Same, plus payment jumps and a possible frozen line

How Does a Home Equity Loan Work?

The FTC describes a home equity loan, sometimes called a second mortgage, as a loan secured by your home. You usually get the money as a lump sum up front and repay it in equal monthly payments over a fixed term. These loans typically have a fixed annual percentage rate (APR).

How much you can borrow depends on your income, your credit history and the market value of your home. The FTC's home equity guide (September 2025) notes that many lenders prefer that you borrow no more than 80 percent of the equity in your home.

One variation to watch for: the FTC warns that with an interest-only loan, your payments cover only interest, not principal, and you usually owe a lump-sum or balloon payment at the end. It says the balloon payment is often large, and people may need a new loan to pay it off.

How Does a HELOC Work?

The CFPB calls a HELOC an "open-end" line of credit that lets you borrow repeatedly against your home equity. It has two phases:

1. The draw period. You can generally spend up to your credit limit anytime, usually with special checks or a card. The CFPB says the draw period could last 10 years, for example. The FTC notes you may only have to pay interest on what you've borrowed during this phase.
2. The repayment period. Once the draw period ends, you can't borrow any more. The CFPB says the lender may set a schedule to repay the full balance, often over 10 or 20 years (its 2022 booklet says 10 or 15), and that monthly payments are often significantly higher once repayment begins. In some cases, you may have to repay the whole balance as soon as the repayment period starts.

HELOCs usually have a variable interest rate, and the CFPB booklet says your monthly payments may change even if you don't draw more money. The CFPB's booklet explains that the rate is built from an index, such as the U.S. prime rate, plus a margin the lender adds. Some HELOCs let you convert part of your balance to a fixed rate, which the CFPB says is usually higher than the variable rate but more predictable.

The CFPB's HELOC page (reviewed 2026) also notes that some plans require a minimum draw each time (its example is $300), a minimum balance or an initial draw when you open the line.

What Fees and Costs Should You Expect?

Both products can come with up-front costs. The CFPB booklet says some lenders waive some or all of a HELOC's up-front costs while others charge fees, such as:

• An appraisal fee
• An application fee, which might not be refunded if you're turned down
• Closing costs, including fees for attorneys, title search, mortgage preparation and filing

For a HELOC, the FTC says the lender must disclose the APR, payment terms and any application, annual or transaction fees, plus third-party charges like appraisal, credit report or attorneys' fees. The CFPB booklet adds that a HELOC may carry annual maintenance fees even when you aren't using the line, and that if you sell your home, you're generally required to pay off the HELOC in full right away.

Its "Get Three HELOC Estimates" worksheet is a useful checklist: compare the credit limit, APR, index and margin, rate caps, draw and repayment lengths, closing costs, and annual, transaction, inactivity, early termination and prepayment fees.

What Are the Risks?

The biggest risk is the same for both: your home is the collateral. The FTC says that if you don't repay the loan as agreed, your lender can foreclose on your home. The CFPB says to consider a HELOC only if you're confident you can keep up with the payments.

HELOCs add a few risks of their own:

• Payment shock. Payments are often much higher once the repayment period starts, and some plans require a balloon payment. The CFPB booklet warns that if you can't pay a balloon payment in full, you could lose your home.
• Rising rates. With a variable rate, payments can rise even if you don't borrow more.
• A frozen or reduced line. The FTC says a lender may freeze or reduce your line if your home's value declines significantly below the appraised amount, or if it reasonably believes a material change in your finances means you can't make your payments.

The CFPB booklet suggests asking yourself two questions first: "Have I considered other sources of money and loans, besides a HELOC?" and "Am I comfortable with the worst-case scenario, where I could lose my home?"

Is the Interest Tax Deductible?

Sometimes. For 2025 returns, IRS Publication 936 says interest on home equity loans and lines of credit is deductible only if the borrowed funds are used to buy, build or substantially improve the home that secures the loan, and the loan must be secured by your main home or second home.

If the loan money wasn't used to buy, build or substantially improve your home, the IRS says you can no longer deduct that interest, no matter when the debt was taken out. For debt taken out after December 15, 2017, the deduction is limited to interest on the first $750,000 of total home debt ($375,000 if married filing separately). Tax rules can change, so check the current Publication 936 or ask a tax professional before counting on the deduction.

Can You Cancel After You Sign?

Yes, in many cases. The FTC says that if your main home secures the loan, you can cancel within three business days for any reason and without penalty. Business days include Saturdays but not Sundays or legal public holidays, and the deadline is midnight of the third business day.

To cancel, you must tell the lender in writing; a phone call or face-to-face conversation doesn't count. The lender then has 20 days to return the money you paid and release its lien. The right doesn't apply to a vacation or second home. The FTC also advises: if the financing isn't what you expected, don't sign. Negotiate or walk away.

What If You're Near or in Retirement?

Borrowing against your home in retirement can mean taking on a new monthly payment, with your home on the line. The CFPB's HELOC booklet (last updated August 2022) compares a HELOC with other sources of money, including a cash-out refinance (generally higher closing costs), a 401(k) loan (up to 50% of your vested balance or $50,000, whichever is less) and a reverse mortgage, which requires you to be 62 or older and can leave little or no home value for your heirs.

Our guides to reverse mortgage pros and cons, when refinancing makes sense and borrowing from your 401(k) cover those options in more detail. If you're having trouble paying your mortgage, the CFPB suggests talking to a housing counselor to see if there may be other options that make better financial sense. The CFPB booklet also says lenders must give you a list of HUD-approved housing counselors in your area.

How Do You Choose?

It depends on how you'll use the money and how much payment risk you can handle. Questions that help sort it out:

• Do you need one set amount, or money in stages? A home equity loan pays a lump sum. A HELOC lets you draw only what you need during the draw period.
• Do you need a payment that won't change? Home equity loans typically have a fixed APR and equal payments. HELOC payments can change with the rate and are often significantly higher once repayment starts.
• Are you confident you can keep up with the payments? The CFPB says to consider a HELOC only if you're confident you can keep up with the loan payments, and its booklet asks whether you've considered other sources of money and loans.

Whatever you pick, the FTC says shopping around can help you get better terms, and the CFPB booklet's worksheet compares three estimates side by side. Our mortgage payment calculator can help you estimate what a fixed monthly payment would look like, and our guide to paying off your mortgage faster covers ways to reduce what you owe on your home.

The Bottom Line

A home equity loan gives you predictability: one lump sum, usually a fixed rate and equal payments. A HELOC gives you flexibility: borrow as you go, usually at a variable rate, with payments that often rise once the draw period ends. Both put your home on the line, so borrow only what you're confident you can repay, read every disclosure, and remember you generally have three business days to cancel if your main home secures the loan.

This article is general education, not individualized financial, tax or legal advice.

Frequently asked questions

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

How you get the money. A home equity loan pays you a specific amount in a lump sum. A HELOC lets you borrow or draw money multiple times up to a maximum amount, and payments you make free up credit again, like a credit card.

Is a HELOC or a home equity loan better?

Neither is better for everyone. A home equity loan pays a lump sum, typically at a fixed rate with equal payments. A HELOC lets you draw money as needed, usually at a variable rate, with payments that are often significantly higher once the draw period ends. The CFPB booklet suggests asking yourself whether you've considered other sources of money besides a HELOC.

Is HELOC interest tax deductible?

For 2025 returns, IRS Publication 936 says interest on home equity loans and lines of credit is deductible only if the borrowed money is used to buy, build or substantially improve the home that secures the loan. The total home debt limit is $750,000, or $375,000 if married filing separately, for debt taken out after December 15, 2017. Check the current year's Publication 936 or ask a tax professional.

Can a lender freeze my HELOC?

Yes, in certain cases. The FTC says a lender may freeze or reduce your line if your home's value declines significantly below the appraised amount, or if it reasonably believes you won't be able to make your payments because of a material change in your finances.

Can I cancel a home equity loan or HELOC after signing?

If your main home secures the loan, federal law generally gives you until midnight of the third business day to cancel for any reason without penalty. You must tell the lender in writing. The right doesn't apply to a vacation or second home.

Sources

1. CFPB: What Is the Difference Between a Home Equity Loan and a HELOC?
2. CFPB: What Is a Home Equity Line of Credit (HELOC)?
3. FTC: Home Equity Loans and Home Equity Lines of Credit
4. CFPB: What You Should Know About Home Equity Lines of Credit (booklet)
5. IRS: Publication 936 (2025), Home Mortgage Interest Deduction

This guide is general information, not personal advice. Your situation may differ, so consider talking with a qualified professional, such as a fiduciary financial adviser, CPA or licensed agent, before making a decision.