Your roof needs replacing, the quote is $50,000, and your home is worth far more than you owe on the mortgage. The equity in the house looks like the cheapest money you can borrow, and it often is. The question is how to take it out: one lump sum with a fixed payment, or a credit line you draw from as needed.
Both use your home as collateral, and both are second mortgages. That hides a real difference in how the money arrives, how the rate behaves, and what the bill looks like five or ten years from now. Picking the wrong one does not just cost extra interest. It can leave you with a payment that jumps when you least expect it.
Quick answer
A home equity loan pays one lump sum at a fixed rate, with the same monthly payment until it is repaid. Good for one known cost. A HELOC is a credit line with a variable rate: draw what you need during the draw period, then repay the balance over later years. Pick the loan for certainty, the HELOC for flexibility.
How a Home Equity Loan Works
A home equity loan is a specific amount borrowed against the equity of your home, paid out in one lump sum at closing. Equity is the value of your home minus the amount you still owe on your mortgage. If your home is worth $400,000 and your mortgage balance is $250,000, you have $150,000 of equity.
Home equity loans usually have a fixed interest rate, repaid in equal monthly payments covering principal and interest over a set term. The payment never changes, so the budget never surprises you. The trade-off is that interest starts on the full amount from day one, and needing more later means applying for a new loan. The Consumer Financial Protection Bureau explains this lump-sum structure in its comparison of home equity loans and HELOCs. Our guide to home equity loans covers the lump-sum option in detail.
How a HELOC Works
A home equity line of credit, or HELOC, is an open-end line of credit that lets you borrow repeatedly against your home equity, much like a credit card secured by your house. The lender approves a maximum limit, and you draw when you need it. As you repay what you borrowed, the credit becomes available again.
A HELOC has two phases. During the draw period, which could last 10 years, you can borrow and usually make interest-only payments, so the balance does not fall unless you pay principal. After the draw period ends, you can no longer borrow and enter the repayment period. The lender sets a schedule to repay the full balance, often over 10 or 20 years, and monthly payments are often significantly higher once repayment starts. Some plans require the whole balance to be paid at once when repayment begins. The Consumer Financial Protection Bureau describes both phases on its HELOC page.
HELOCs usually have a variable interest rate, so your payment can change from month to month even if you borrow nothing more. The rate typically follows a benchmark such as the prime rate plus a margin the lender sets. Lenders can also charge setup fees, and some plans require a minimum draw.
Home Equity Loan vs HELOC at a Glance
| Home equity loan | HELOC | |
|---|---|---|
| How you get the money | One lump sum at closing | Draw as needed up to a limit |
| Interest rate | Usually fixed | Usually variable |
| Monthly payment | Same every month, principal and interest | Interest-only during the draw, then principal and interest |
| Borrowing more later | Apply for a new loan | Draw again as you repay |
| Best for | One large one-time cost | Ongoing or phased costs |
How to Decide in Five Steps
1. Name the job and its cost. A single fixed bill, such as a roof, points to a loan. A project in stages, such as a renovation spread over a year, points to a HELOC. If you cannot name the cost, do not borrow against the house yet.
2. Add up the equity and the cap. Subtract the mortgage balance from the home value to find the equity. Lenders let you borrow up to a percentage of that equity, not all of it, so ask each lender for its cap before comparing offers.
3. Test the payment you will actually face. A loan payment is fixed. For a HELOC, test two numbers: the interest-only payment during the draw and the much larger payment during repayment. If the repayment payment would strain the budget, the HELOC is the wrong choice no matter how cheap the draw period looks. Use our home loan calculator to test the payment at different rates and terms.
4. Compare the full cost, not just the rate. A loan can carry closing costs, and a HELOC can carry annual fees, transaction fees, and an early-closure fee. Add the fees to the interest before deciding.
5. Get three estimates and compare them side by side. The Consumer Financial Protection Bureau suggests that in its HELOC booklet: collect the rate, the margin, the draw and repayment lengths, and the fees, then lay the offers next to each other. The cheapest headline rate often loses once the other terms are visible.
Worked Example: $50,000 for a New Roof
Example: the figures below are illustrative, using stated rates as assumptions, not current market rates.
Take a home worth $400,000 with a $250,000 mortgage balance, so the equity is $150,000, and a $50,000 roof quote.
The home equity loan path. Borrow $50,000 at a fixed 8% over 15 years. The payment is $478 a month and never changes. Over 15 years you pay about $86,009 in total, of which about $36,009 is interest, and then the debt is gone.
The HELOC path. Open a $50,000 line and draw it all at a variable rate starting at 8.5%. During a 10-year draw period with interest-only payments, the monthly bill is $354, but after 10 years you still owe the full $50,000, having paid $42,500 in interest without reducing it. Then the 15-year repayment period begins at 8.5%, and the payment jumps to $492 a month. That phase costs about $88,627 in total, of which about $38,627 is interest.
The comparison. The HELOC path takes 25 years instead of 15, and the total paid is about $131,127, about $81,127 of it interest, or about $45,118 more interest than the loan for the same $50,000 roof. The gap is the cost of paying interest only for 10 years while the balance sits untouched. The HELOC bill can also rise: if the variable rate climbs to 10.5% during the draw, the interest-only payment rises from $354 to $438 a month.
The HELOC only wins if the money is genuinely needed in stages, or if the borrower pays principal during the draw instead of interest only. For a single fixed bill, the loan is cheaper and finishes sooner.
Common Mistakes
- Borrowing the maximum the lender offers instead of what the job costs. Every extra dollar borrowed pays interest.
- Judging a HELOC by its interest-only payment, never budgeting for the repayment jump.
- Using home equity for spending that does not improve the home, such as a car or a vacation. The interest is not tax deductible, and the debt is still secured by the house.
- Borrowing against the house to pay off another loan. Refinancing that loan is usually safer, since it does not put the home at risk. See our guide to refinancing an auto loan.
- Treating a HELOC like free money during the draw period. Interest-only payments feel small because they repay nothing.
- Forgetting the home is collateral: missed payments can lead to foreclosure.
Pros and Cons
Home equity loan pros
- A payment that never changes with a fixed rate.
- A payoff schedule with a finish date.
- The total cost is easy to calculate from a known amount.
Home equity loan cons
- Interest starts on the full amount at once, even if you spend it slowly.
- No flexibility if the project grows; a new loan means a new application.
- Closing costs can add to the amount borrowed.
HELOC pros
- You pay interest only on what you draw, not on the full credit limit.
- Credit replenishes as you repay, so you can borrow again without reapplying.
- Flexible timing suits projects that arrive in stages.
HELOC cons
- The variable rate can push payments up, and the repayment period pushes them further.
- Interest-only payments leave the balance untouched.
- Easy access makes it tempting to keep borrowing against the home.
Frequently Asked Questions
Is interest on a home equity loan or HELOC tax deductible?
Only when the borrowed money is used to buy, build, or substantially improve the home that secures the loan, under IRS Publication 936. Interest on money used for anything else, such as paying off credit cards or buying a car, is not deductible. The deduction also has a combined debt limit of $750,000 for loans taken after December 15, 2017, and you must itemize to claim it. Ask a tax professional before counting on a deduction, and see our guide to when taxes are due for filing dates.
What happens when the HELOC draw period ends?
You can no longer borrow, and you enter the repayment period. The lender sets a schedule to repay the full balance, often over 10 or 20 years, and monthly payments are often significantly higher than the interest-only payments from the draw. Some plans require the whole balance at once when repayment begins.
Can you have both a home equity loan and a HELOC?
Yes. Each is a separate loan secured by the same home, with its own payment. Total borrowing is limited by your equity and by each lender’s cap, so having one reduces what you can get from the other. Two second mortgages mean two monthly payments.
Which is better for a home renovation?
It depends on how the work is billed. One contractor, one price, and one start date point to a home equity loan, since the cost is known and the fixed payment fits it. Work that arrives in phases over months points to a HELOC, because you draw only what each phase needs. Either way, borrow for the renovation, not for spending on top of it.
Final Thoughts
Match the product to the shape of the spending: a single known cost wants a single known payment, which is a home equity loan, while spending in stages wants a flexible line, which is a HELOC. Run the repayment-period payment, not just the draw-period one, through the budget before signing. If that future payment would strain the household, the answer is already clear.
Sources: the Consumer Financial Protection Bureau, and IRS Publication 936.
Sources and methodology
The figures, rules, and rates in this guide come from the authoritative sources linked throughout the article, including consumerfinance.gov, files.consumerfinance.gov. Where a figure is an estimate or a worked example, the article says so.
