Home Equity Loan vs. HELOC
Same house, same equity, two very different repayment schedules. Put your quoted rates in below and see what each one costs — the payment you start with, the payment you end with, and the total either way.
Over its full life the loan costs $40,127 in interest and closing costs, against $61,825 for the line. It is not the one with the smaller first payment — see below.
- Total interest
- $38,627
- Closing costs
- $1,500
- Cost of credit
- $40,127
- Total out of pocket
- $90,127
- Interest during draw
- $21,875
- Interest during repayment (8.75%)
- $39,950
- Closing costs
- $0
- Cost of credit
- $61,825
- Total out of pocket
- $111,825
Both products are priced on the assumption that you draw the full $50,000 at closing and pay only the required minimum. A HELOC that you draw down slowly, or pay principal on during the draw period, costs less than the figure above.
Key differences
| Home equity loan | HELOC | |
|---|---|---|
| How the money arrives | One lump sum at closing. | A credit line you draw from as you need it. |
| Interest rate | Fixed for the life of the loan. | Variable — typically the prime rate plus a margin, moving with it. |
| What you pay interest on | The full amount, from day one. | Only the balance you've actually drawn. |
| Payment, early years | Principal and interest, level, from the first month. | Often interest-only for the whole draw period. |
| Payment, later years | Identical to the first one. | Jumps when repayment begins — the balance amortizes over what's left. |
| Re-borrowing | None. Closed-end: repay it and it's gone. | Yes, up to your limit, for as long as the draw period runs. |
| Who carries the rate risk | The lender. | You. |
| Collateral | Your home. | Your home. |
Everything below follows from two rows: who carries the rate risk, and whether the early payments touch principal.
When to choose a home equity loan
Take the fixed loan when you know the number. A roof, a settlement, a single balance you're paying off — one amount, known today, needed today. The lump sum matches the need exactly, and every payment from the first one reduces what you owe.
Take it, too, when the payment has to be predictable. A fixed second mortgage payment is one of the few debts that will look identical in year nine, which matters if your income is fixed or your budget has no slack. The lender is absorbing the rate risk on your behalf, and in a rising-rate environment that absorption is worth paying a slightly higher starting rate for.
And take it if you suspect discipline is the binding constraint. An interest-only payment is an invitation to leave the balance alone, and a revolving line is an invitation to re-borrow what you just repaid. A closed-end loan cannot be re-drawn. If the money is going toward credit card balances, that property is not a small one — when debt consolidation makes sense is largely a discussion of what happens after the cards hit zero.
When to choose a HELOC
Take the line when you don't know the number, or don't need it yet. This is the case the calculator above can't show you, because it holds the drawn amount equal on both sides. In real life a HELOC charges interest only on what you've taken. Borrow $60,000 of capacity for a renovation and draw $15,000 of it in March, $20,000 in July, and the rest in November, and you have paid interest on a small fraction of what a $60,000 lump-sum loan would have charged you from day one. Undrawn capacity is free.
Take it when the need recurs. Tuition each semester, a business with seasonal working capital, a rolling series of repairs — the line replenishes as you repay it, and you close one set of papers instead of five.
Take it when you have a credible reason to expect rates to fall and a budget that could survive being wrong. The calculator prices this directly: set a negative rate change and watch the break-even move.
What none of these reasons is: the low interest-only payment. That payment is small because it does nothing. If you take a line and then pay it like a loan — the amortizing payment, from month one, during the draw period — you get the line's flexibility with the loan's trajectory, and the draw-period interest in the results above mostly disappears. Extra payment savings prices what each dollar above the minimum buys on any balance. On an interest-only HELOC, every one of those dollars is principal.
Current rate environment considerations
A HELOC's rate is almost always the prime rate plus a margin set at underwriting. The margin is yours for the life of the line; prime moves with the Federal Reserve's target rate. So when you take a line, you are not choosing a rate — you are choosing a spread over a rate that someone else will set, every few months, for the next twenty or thirty years.
That makes the choice a directional one, and the honest position is that nobody knows the direction. What you can know is your exposure. The break-even figure in the results above answers it precisely: the repayment-period rate at which the line stops being the cheaper option. If that number sits well above anything prime has plausibly reached, the line has room. If your assumed rate is already close to it, you are betting on cuts to break even, which is a strange thing to be doing with a lien on your house.
Three details worth asking a lender about before you sign, because they change the shape of the risk more than a quarter-point of margin does. First, the lifetime cap — the maximum rate the line can ever charge, which is your actual worst case, not the number in a calculator. Second, the fixed-rate conversion option, which lets you carve a drawn balance out at a fixed rate and turns the rate bet into something you can exit. Third, what happens at the end of the draw period: whether the balance amortizes, balloons, or renews, and over how many months. A ten-year draw followed by a ten-year repayment is a very different product from one followed by twenty.
None of this is a reason to prefer the fixed loan by default. A fixed rate is insurance, and insurance has a premium — usually a higher starting rate and real closing costs. What it buys is the removal of exactly one variable. Whether that variable was worth removing you will only know afterward.
If this is about credit card debt
A large share of home equity borrowing exists to retire unsecured balances, and the comparison above is the wrong first question if that's you. The right first question is whether to convert unsecured debt into secured debt at all. A credit card company that doesn't get paid sues you; a mortgage lender that doesn't get paid takes the house. Lowering the rate raises the stakes.
The debt consolidation calculator prices a consolidation loan — home equity or otherwise — against simply attacking your existing balances highest-rate-first, and shows the month the new loan actually pulls ahead. Often it pulls ahead immediately, and the arithmetic is not the problem. The problem is the cards, which are now empty, and which stay empty only if the thing that filled them has changed.
Frequently asked questions
Is a HELOC cheaper than a home equity loan?
It depends on far more than the rate you're quoted. If you draw the full amount at closing and pay only the required minimum, the HELOC's interest-only draw period usually makes it the more expensive of the two — you spend years paying interest on a balance that never moves. Where the line wins is when you don't need the whole sum at once. A HELOC charges interest only on what you've actually drawn, so a contractor paid in four stages over a year borrows far less HELOC-dollar-months than a lump-sum loan would. Run both above with your real quoted rates.
Which has the lower monthly payment?
The HELOC does, during its draw period, and it isn't close. An interest-only payment on a $50,000 balance at 8.75% is about $365; a 15-year fixed loan at the same size and rate is roughly $500. But the first number buys you nothing — the balance is the same $50,000 the day the draw period ends. The second number is retiring the debt with every payment. The calculator above shows the payment you'll be making after the draw period closes, which is the number that actually needs to fit your budget.
What is HELOC payment shock?
The month the draw period ends, the required payment stops being interest-only and becomes a fully amortizing payment on the entire remaining balance — over a repayment period that is often shorter than the draw period was long. Payments commonly double or worse. It is the single most-missed feature of the product, because the draw period is long enough that most borrowers have stopped thinking about it by the time it arrives.
Can I lose my house with either one?
Yes, with both. A home equity loan and a HELOC are each secured by your home, which is exactly why their rates are so much lower than a credit card's. Default risk is the price of that rate. This matters most when the borrowed money is going toward unsecured debt: converting credit card balances into a lien on your house lowers the interest rate and raises the stakes of missing a payment.
Is the interest tax deductible?
Only under narrow conditions, and only if you itemize. Interest on home equity debt is deductible when the proceeds are used to buy, build, or substantially improve the home that secures the debt — a kitchen remodel can qualify, paying off credit cards does not. Limits apply to combined mortgage debt. Check IRS Publication 936 or a tax professional before counting a deduction into your math; this calculator ignores taxes entirely.
Can I lock a fixed rate on a HELOC balance?
Many lenders offer a fixed-rate conversion option that lets you carve out some or all of your drawn balance and amortize it at a fixed rate, sometimes for a fee, sometimes limited to a few conversions over the life of the line. It is worth asking about before you sign, because it turns the rate-risk question from a bet into an option. Terms vary widely between lenders, so read the specific ones you're offered rather than assuming the feature exists.
Should I use home equity to pay off credit cards?
The arithmetic is usually favorable and the behavior usually isn't. Trading a 24% unsecured balance for an 8% secured one saves real money — but only if the cards stay at zero. Lenders see the same balances reappear often enough that it has a name. If you're considering this, work through when debt consolidation makes sense first, and be honest about what put the balances there.
How much equity do I need to qualify?
Lenders cap the combined loan-to-value ratio on your home — your first mortgage plus the new second, divided by the appraised value — and the ceiling varies by lender and by product. Your borrowing capacity is that ceiling times the appraisal, minus what you still owe on the mortgage. Appraisals for second liens are often automated valuations rather than full walk-throughs, which means the number the lender uses may not match what you think the house is worth.
Related debt tools
Debt Consolidation Calculator
If the equity is going toward credit cards, price the consolidation loan against just paying the cards down.
When Debt Consolidation Makes Sense
The prior question to this one: whether borrowing against your house to clear unsecured debt is a good idea at all.
Extra Payment Savings
What paying principal during a HELOC's draw period actually buys you, on any balance and rate.
Interest Rate Comparison Calculator
Two fixed-rate offers, head to head, with the up-front fees folded in.
Estimates are educational only and are not financial advice. The comparison assumes you draw the entire amount at closing, pay interest only during the HELOC's draw period, and then amortize the full balance over the repayment period; interest compounds monthly and payments are applied at the end of each month. The line's rate is held flat during the draw period and shifted once, by the amount you enter, when repayment begins — real variable rates move continuously. Closing costs are treated as paid up front rather than financed. Annual line fees, inactivity and early-closure fees, rate caps and floors, draws taken after closing, and any tax treatment of the interest are not modeled. The presets are illustrative starting points, not quoted market rates — replace them with the terms your lender actually offered.