Home equity loans vs. HELOCs: Which is better?

What is home equity?
Home equity is the percentage of your home you own outright, versus the amount you still owe on a mortgage. If you made a 20% down payment, you’d start out with 20% equity.
As you make monthly payments and the value of your home increases, the equity in your home will go up, as well. So, if your home was appraised at $500,000 and your mortgage balance is $300,000, you have 40% home equity. The relationship between the equity in your home and its value is your loan-to-value (LTV) ratio. Home equity is a significant part of your net worth and can be used to access cash through HELOCs, home equity loans, home equity sharing and other financing tools.
What is a home equity loan?
In a sense, a home equity loan is a second mortgage. Instead of paying for your house, though, it’s providing you with a lump sum of cash.
Home equity loan requirements Home equity : 15% to 20%
: 15% to 20% Credit score : 620 to 680
: 620 to 680 Debt-to-income ratio: 43%
Most lenders will approve a home equity loan for 85% to 90% of your house’s value, meaning you need at least 10% or 15% equity.
The interest rate on a home equity loan is typically fixed, though some lenders will offer an adjustable rate.
You repay the loan in monthly installments that can last anywhere from 5 to 30 years. Home equity loans are an attractive alternative to personal loans and other financing because of their lower rates and longer repayment terms. There’s no limit on what you can use a home equity loan for, but the interest is only tax-deductible if it’s spent on building, repairing or renovating your property. And because you’re using your house as collateral, your lender can force you into foreclosure if you fail to make payments.
Home equity loan: Pros and cons
Pros Larger sum available than a personal loan or credit card
Relatively lower interest rate
Longer repayment period
Fixed interest rate makes payments easier to predict
No limit on what funds can be used for
Interest is tax-deductible if used for home repairs or renovations
Cons Typically need at least 15%-20% home equity
Approval time is considerably longer than HELOC or personal loan
Application fees, closing costs and other upfront charges
Can lead to negative equity if loan balance exceeds home’s value
Lender can foreclosure if you fail to make payments or default
Best lenders for home equity loans
Like other financial products, home equity loans vary by lender. Consider how much you need to borrow, the interest rate you can afford and how much you have to put towards closing costs. Best for no closing fees: Flagstar Bank
Flagstar Learn More Annual Percentage Rate (APR) Apply online for rates.
Types of loans Conventional, FHA, VA, USDA, jumbo, renovation, Destination Home Mortgage, HomeReady, Home Possible, HELOC, refinancing, ReFi Now, Refi Possible
Terms 15-year and 30-year fixed-rate loans; 5-year, 7-year, 10-year intro period for adjustable-rate loans
Credit needed 620 for conventional, 600 for Destination Home Mortgage
Minimum down payment 3% for conventional loans, 0% for VA, USDA and Destination Home Mortgage
Flagstar doesn’t charge closing fees and will approve home equity loans for as little as $10,000 or as much as $1 million, a much wider range than most competitors. Minimum loan amount: $10,000
Maximum loan amount: $1 million
Repayment terms: 10, 15 or 20 years
Maximum loan-to-value ratio: 80% Best for high loan-to-value ratio: Discover
Discover® Home Equity Loan Learn More Annual Percentage Rate (APR) Apply online for personalized rates
Loan minimum and maximum $35,000 minimum, $300,000 maximum
Terms available 10,15, 20, 30 years
Credit needed 680
Minimum equity required 10% Pros Accepts combined loan-to-value ratio of 90%.
No origination fees, appraisal fees or prepayment penalty
Mortgage refinancing available Cons No purchase mortgages or HELOCs
No in-person branches
$35,000 loan minimum is higher than most
$300,000 loan maximum is lower than most Learn More View More
Discover lends in all 50 states and approves home equity loans for up to 90% of a home’s value, higher than many competitors. In addition, it doesn’t charge closing costs, which can equal more than 5% of your loan total. Minimum loan amount: $35,000
Maximum loan amount: $300,000
Repayment terms: 10, 15, 20 or 30 years
Maximum loan-to-value ratio: 90%
What is a HELOC?
While a home equity loan is a lump-sum cash payment, a home equity line of credit (or HELOC) is a line of revolving credit. Like a credit card, a HELOC comes with a credit limit you can borrow up to. Borrowers have a draw period, usually 10 to 15 years, in which they can tap their line of credit. During this period, you’re only required to make interest payments. (If you make payments on the principal, your available credit goes back up.) After the draw period ends, you begin the repayment period and can no longer use your line of credit. You’ll have a set time frame (most often 20 years) to repay any remaining principal, plus interest. The requirements for a HELOC are similar to those for a home equity loan. And, like a home equity loan, your lender can force you into foreclosure for lack of payment. One notable difference is that home equity loans usually have fixed interest rates and HELOCs are typically adjustable. That’s a plus when interest rates are declining, but it can be a drawback if they start to climb. It also means your monthly payments are less predictable. Another difference is that you can access HELOC funds in as little as a few days while closing on a home equity loan can take as long as two months.
Home equity line of credit: Pros and cons
Pros Lower rates and longer terms than personal loans, cards and even home equity loans
No limit on what money can be used for
Only charged interest on what you’ve spent
If used for home improvements, the interest is tax-deductible
Funded faster than a home equity loan
Cons Eats up your available equity
Variable rates mean the cost of borrowing can increase
Monthly payments are less predictable
Risk of upside-down mortgage and foreclosure
Best lenders for HELOCs
We picked the best lenders for a HELOC based on rates, terms, fees, customer service and other factors. Best for no fees: Bank of America
Bank of America Home Mortgage Loans Learn More Annual Percentage Rate (APR) Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
Types of loans Conventional, FHA, VA, Affordable Loan Solution® mortgage, jumbo, medical professional, refinancing, HELOC
Terms Varies
Credit needed 620 for conventional, 580 for FHA, 680 for jumbo
Minimum down payment 3% with Affordable Loan Solution®
Terms apply.
Offers first-time homebuyer assistance? Yes — click here for details Pros Can get Affordable Loan Solution® mortgage with 3% down
Up to $10,000 in down payment assistance for eligible borrowers
Up to $7,500 in closing cost grants in select markets
No annual fees or closing costs for HELOCs
Existing customers eligible for discounted rates or fees Cons Lender fees not disclosed
No USDA loans, home equity loans or reverse mortgages Learn More View More
Bank of America doesn’t charge application fees or closing costs for HELOCs. And, with more than 3,800 branches nationwide, you can count on in-person service when you need it. Minimum draw: $15,000-$25,000
Maximum draw: Up to $1 million
Repayment term: 20 years
Maximum loan-to-value ratio: 85% Best for low rates: Third Federal
Third Federal Savings & Loan Learn More Annual Percentage Rate (APR) Apply online for personalized rates
Types of loans Conventional loan, jumbo loan, refinancing, HELOC
Terms 10-30 years
Credit needed Not disclosed
Minimum down payment 3% for conventional loan Terms apply. Pros Guarantees lowest rate or will give borrower rate reduction or up to $1,000.
Offers low closing cost options.
No closing fees for HELOC Cons Doesn’t offer USDA, FHA or VA loans
Available in only half of U.S. states Learn More View More
Third Federal advertises that its interest rates on HELOCs are 0.50% lower than the industry average and it doesn’t charge closing costs, which can equal up to 5% of your loan amount. There’s also no minimum draw, so you can spend just what you need. Minimum draw: $10,000
Maximum draw: $300,000
Repayment term: 20 years
Maximum loan-to-value ratio: 80%
Requirements for HELOCs and home equity loans
To get approved for either a HELOC or a home equity loan, you typically need: At least 15% to 20% home equity
A credit score of between 620 and 680
A maximum debt-to-income ratio of 43%
Stable, verifiable income Some lenders will work with borrowers with bad credit or other risk factors, including LoanDepot and TD Bank, but you should expect higher interest rates. You may want to consider working with a mortgage broker or getting a co-signer.
Home equity loan vs. HELOC: Which is better?
Which loan type is better for you depends on several factors, including your risk tolerance, what you want to use the money for and how much you have on hand to put toward repayment. A home equity loan could make more sense if you need a one-time cash infusion to pay for repairs or buy a car. But a HELOC could be the better option if you have recurring costs, like ongoing home renovations or college tuition. With a HELOC, you only pay interest on the portion of the line of credit you use. If you tap too much of your line of credit at once, however, your credit score will take a real hit. (Some experts suggest keeping your credit utilization rate below 30%, while others say below 10% is best.)
HELOCs Home equity loans Structure Revolving line of credit with draw period of 5-10 years One-time loan funding Rate Variable Fixed Approval timeline As little as two weeks up to two months Repayment terms 20 years 5-30 years Payment schedule Interest-only option during draw period, then principal and interest during repayment Monthly payment includes repayment of principal plus interest Best for Ongoing renovations, college tuition, recurring medical bills Onetime renovation project, consolidating high-interest debt buying a car, paying for a wedding
Home equity and HELOC alternatives
There are other ways to access cash, including some that don’t leverage your home’s value. Cash-out refinancing Cash-out refinancing is a type of mortgage refinancing that lets borrowers get more than their existing home loan balance and receive the remaining funds as cash. Refinancing your mortgage will probably take longer than a home equity loan or HELOC, but the credit requirements are more flexible and you’ll likely get a lower interest rate. Home equity sharing If you don’t want to take out a loan or refinance — or if you don’t have a strong enough financial profile — a home equity sharing agreement lets you access cash in exchange for partial ownership of your home and a share of any future appreciation.
Like HELOCs and home equity loans, your lender will have a lien on your house. But instead of monthly payments, you’ll repay the loan in full at the end of your term (anywhere from 10 to 30 years) or when you sell the house.
Rather than interest, you’ll pay an amount equal to your risk adjustment rate, based on the home’s value at the end of the term.HomeTap, Point and HomePace are among the top home equity investment (HEI) companies. Personal loan If you don’t want to use your house as collateral, you can always apply for a personal loan. It’s a better option if you need less, since lenders usually cap personal loans at $50,000 or $100,000. Your interest rate will likely be higher than with a home equity loan or HELOC and the repayment term shorter. In addition, you won’t be able to write off the interest — even if you use it for home renovations. The chief benefits of a personal loan are the lower credit score threshold and there’s no risk of foreclosure.
FAQs Is the interest on a HELOC or home equity loan tax deductible? Under the Tax Cut and Jobs Act of 2017 (TCJA), interest on a HELOC or home equity loan is only tax deductible if the money is used to build, repair or substantially improve the property. Without action from Congress, the TCJA will expire at the end of 2025 and borrowers will be able to write off either loan no matter how the money is spent. Which gets your money faster: HELOC or home equity loan? How quickly you can get funded with a HELOC or home equity loan depends on your lender, the complexity of your finances and when you can get an appraisal scheduled. Typically, though, you can access your HELOC in as little as a few days, while home equity loans can take up to two months. Can I get a home equity loan on an inherited property? Yes, you can get a home equity loan on an inherited property. You can use the money to buy out other heirs, make repairs on the property, pay off the mortgage or cover legal fees relating to the estate, among other reasons. Do HELOCs compound interest? Most lenders use simple interest to calculate payments on a HELOC, rather than compound interest (where interest builds on top of interest). Read your loan agreement’s terms and conditions before signing.
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