Home Equity Line of Credit (HELOC) vs Home Equity Loan

Home equity loans (HELOANs) and home equity lines of credit (HELOCs) both use the value of your home, but they are used for very different things. HELOANs give you a lump sum of money with a fixed rate that is good for one-time costs like repairs, while HELOCs give you revolving credit that you can use whenever you want during a 10–15 year draw period. Knowing the pros and cons of fixed payments that are easy to predict versus variable rates, full disbursement right away versus on-demand access, and borrowing once versus having access to it all the time will help you choose the right product for your financial goals. Both usually let you borrow up to 80–85% of the value of your home minus the amount you owe on your mortgage. To qualify, you need a credit score of at least 620 and a debt-to-income ratio of less than 43%.

One of the benefits of being a homeowner is that your home is more than just a place to live. Over time, it can become a powerful financial asset thanks to the home equity you build over time.

Home equity is the difference between your home's worth and what you owe on your mortgage. As this amount grows, you can tap into it for a variety of financial goals.

That might mean funding home improvements, consolidating high-interest debt, or covering unexpected expenses. Homeowners can often access these funds at lower interest rates than credit cards or personal loans.

When borrowing, however, choosing between a home equity loan vs. a home equity line of credit (HELOAN vs. HELOC) can be confusing. While both options leverage your home's value, they differ in structure, flexibility, and repayment terms.

Let's break down these two borrowing methods to help you determine which may best fit your financial needs.

What is a home equity loan (HELOAN)?

A home equity loan (HELOAN) allows homeowners to borrow a lump sum of money using their home's equity as collateral. The loan amount is based on the percentage of the home's current market value minus the homeowner's outstanding mortgage balance.

HELOANs typically feature fixed interest rates and repayment terms ranging from five to 30 years, making them a predictable option for homeowners who prefer stable monthly payments. Once approved, borrowers immediately receive the full loan amount and begin repaying it in fixed installments over the term of the loan.

In general, HELOANs are best suited for homeowners who need a large, one-time influx of money. Many use these loans to fund home renovations, consolidate debt, or cover significant expenses like medical bills or tuition. And because the loan is secured by your home, interest rates are typically lower compared with unsecured loans like credit cards and personal loans.

HELOAN requirements

If you're a homeowner considering a home equity loan, be aware that lenders typically require the following:

• Sufficient home equity: With a HELOAN, most lenders allow you to borrow up to 80% to 85% of your home's value minus any existing mortgage balance.
• Good credit: A credit score of 620 or higher is typically required to qualify for a HELOAN. Higher scores (700+) will generally be eligible for lower interest rates.
• Stable income and low debt-to-income (DTI) ratio: Many lenders prefer a DTI of 43% or lower to ensure HELOAN borrowers can manage their monthly payments. You can calculate your DTI by adding up all your monthly debt payments and dividing by your monthly income.
• Fixed loan amount and terms: Home equity loans provide a one-time lump sum with fixed terms.
• Property appraisal: Lenders typically require an up-to-date home appraisal to confirm your home's market value.

While these requirements apply to most home equity products, HELOANS stand out for their structured repayment terms and fixed-rate predictability.

HELOAN pros and cons

Choosing between home equity options is more than just about numbers. It's about finding the right fit for your financial goals and comfort level. A HELOAN offers stability and structure, but like any loan, it comes with trade-offs that may or may not align with your needs.

Here are the main pros and cons of choosing a HELOAN:

Pros

• Predictable payments: Fixed interest rates and structured repayment terms make budgeting easier.
• Lower interest rates: Because HELOANS are secured by your home, rates are often lower than other types of loans (e.g., personal loans, credit cards). Precise rates will vary based on credit score, loan terms, and lender policies.
• Lump-sum payout: Home equity loans are ideal for major, one-time expenses like renovations or debt consolidation.
• Potential tax deductions: Interest paid for HELOANS may qualify for tax deductions if used for eligible home improvements.* Check with a tax professional for more information.

Cons

• Foreclosure risk: Just like your regular mortgage payments, defaulting on HELOAN payments could result in losing your home.
• Less flexibility: Receiving a single lump sum through a HELOAN means you cannot borrow additional funds without taking out a new loan. This is a significant difference between a home equity loan vs. a home equity line of credit (more on how HELOCs work later).
• Upfront costs: Closing costs and fees can add to the overall expense of borrowing via a home equity loan.
• Loan is tied to home's value: If your property values decline, you could end up owing more than your home is worth (negative equity).

What is a home equity line of credit (HELOC)?

A home equity line of credit (HELOC) is a revolving credit line that allows homeowners to borrow against their home's equity as needed rather than receiving a lump sum upfront. It gives borrowers the flexibility to withdraw funds up to a pre-approved limit during what's known as the "draw period" --- a window that typically lasts 10 to 15 years.

During this draw period, borrowers can take money out as needed and pay interest only on the amount borrowed. Once the draw period ends, the repayment period begins. This typically lasts from 10 to 20 years. During this time, borrowers repay the principal plus interest, which is often variable.

A HELOC is well-suited for homeowners who want ongoing access to funds (not a single lump sum) for expenses like home improvements, emergency costs, and tuition.

HELOC requirements

To qualify for a home equity line of credit vs. a loan, lenders typically require the following:

• Sufficient home equity: Most lenders will allow homeowners to set up a line of credit equal to 80% to 85% of their home's appraised value minus any outstanding mortgage balance.
• Good credit: As with a HELOAN, lenders often require a credit score of at least 620 or higher, though higher scores (700+) typically qualify for better rates.
• Stable income and low DTI ratio: Lenders generally require a DTI of 43% or lower to ensure the borrower's ability to repay.
• Ongoing access to credit: Unlike a home equity loan, a HELOC enables borrowers to withdraw funds as needed, which requires discipline to manage repayments.
• Variable interest rates: Since HELOCs have adjustable interest rates, lenders assess borrowers' ability to manage potential rising payments over time.

Because HELOCs offer flexibility, they appeal to homeowners who may anticipate a series of funding needs over time rather than a fixed loan amount.

HELOC pros and cons

A HELOC offers flexibility, but that freedom comes with a higher level of responsibility. Whether it's the right choice for you depends on how comfortably you can manage changing payments and the temptation of ongoing borrowing.

Consider these pros and cons of a HELOC:

Pros

• Flexible access to funds: A key feature of a HELOC is the ability to borrow as needed rather than taking an upfront lump sum of funds.
• Interest--only payment during draw period: This means there are lower initial costs with a HELOC vs. a HELOAN.
• Lower initial payments: Monthly payments are likely to be lower during the early part of the loan repayment, especially if you're paying only interest during the draw period.
• Potential for tax deduction: Interest paid for home equity lines of credit may qualify for tax deductions if the funds were borrowed for home improvements.* Consult a tax professional for more info.

Cons

• Variable interest rates: Due to this, monthly payments may fluctuate, making long-term budgeting more of a challenge.
• The risk of overborrowing: Managing a HELOC requires discipline. The revolving nature of HELOCs can lead to excessive borrowing if you don't manage it carefully.
• Higher long-term costs: Because HELOC payments may start off low but increase over time, the total cost of borrowing can become higher than with a HELOAN.
• Repayment shock: HELOC borrowers are required to start repaying the principal once the draw period ends. This can lead to significantly higher monthly payments.

Home equity loan vs. home equity line of credit

When considering a home equity line of credit vs. a home equity loan, your best choice depends on how you want to access your funds, your comfort with repayment terms and schedules, and whether you prefer fixed or flexible borrowing.

The following chart breaks down what sets each loan type apart from the other:

The bottom line: If you need stability and predictability, a HELOAN may be the right fit. But if you want on-demand access to funds and can handle fluctuating payments, a HELOC might better suit you.

Still unsure? AmeriSave's home equity experts can help guide you to the best solution based on your financial goals.

How to get a home equity loan or HELOC

Applying for a home equity loan or a HELOC is like applying for a mortgage, but as we've established, there are key differences in how each loan type works.

Follow these steps to ensure you choose the best option for your financial situation.

• Establish your financial goals: Are you funding home improvements, consolidating debt, or preparing to cover anticipated expenses? Identifying the exact purpose behind the loan will help you choose the right home equity product.
• Contact a lender: Connect with a mortgage lender to compare rates, terms, and eligibility requirements. Lenders like AmeriSave can assess your financial situation and provide personalized options based on your creditworthiness, income, and your home's value.
• Review loan types: Based on the pros and cons of each option, and with help from your lender, this is the time to determine which option --- a HELOAN or HELOC --- is best for you.
• Determine how much to borrow: Most lenders allow you to borrow up to 80% or 85% of your home's value minus your remaining mortgage balance. Some HELOC providers may even offer up to 95% equity access. Borrowing more means higher monthly payments, so carefully assess how much you need and what you can truly afford.
• Apply for the loan: Now it's time to submit your loan application. The lender will conduct a hard credit check, verify your income, and determine your debt-to-income ratio. The lender will also require a home appraisal to confirm its current market value.
• Plan for repayment: If you get a HELOAN, you will start paying back the loan immediately. HELOCs require just interest-only payments during the draw period, but larger monthly payments kick in during the repayment period. Whichever loan you get, plan accordingly.

Since HELOANs and HELOCs are second mortgages, be mindful that you will have an additional payment each month. Keep this in mind as you plan and manage your upcoming financial obligations.

Still unsure which option is right for you? AmeriSave's home equity experts can help.

Best practices if you plan to use your home equity

To ensure you get the most out of the equity you've built in your home, follow a few best practices when considering taking out a home equity loan or HELOC.

• Develop solid financial habits, such as budgeting, steady income, a plan to pay down debts, a good credit history, and an emergency expense fund.
• Have a plan to pay back the loan or HELOC. Remember that your home is your collateral when you tap into your home equity. If you can't repay, you risk hurting your credit or, worse, losing your home.
• Focus your home equity funds on improving your long-term financial situation. Use it to add value to your home, consolidate and save money on your high-interest debt consolidation, pay for education (leading to greater earning potential), or pay for a significant emergency. Experts recommend against using home equity loans and HELOCs to fund vacations, car purchases, or high-risk investments.
• Understand how your home equity financing will affect your taxes and whether you may qualify for any tax advantages.*

Which is right for you: Home equity line of credit vs. loan?

As you consider your home equity options, remember that there's no one loan option that's universally optimal for everyone's needs, goals, and situations.

"I recommend speaking with a mortgage banker who specializes in all ... types of home equity borrowing to figure out what's best for you and your family," says Mike Bloch, senior vice president of operations at AmeriSave. "I believe that a licensed mortgage banker can help you make the right choice because there are pros and cons to each approach."

Despite both HELOANs and HELOCs being powerful tools to help you achieve your financial goals, remember that these are still loans that must be paid in addition to your current mortgage. So, play it smart by only borrowing against your home's equity to improve your long-term financial situation.

To learn more about a home equity loan vs. a home equity line of credit, get started by contacting an AmeriSave mortgage banker or getting a quick quote on a cash-out loan today.

*This tax information is provided for general purposes only and should not be relied on or construed as tax advice. Consult with a qualified tax preparer for more information.