The main differences
| Home equity loan | HELOC | |
|---|---|---|
| How you get the money | One lump sum at closing | Draw as needed, up to a limit |
| Interest rate | May be fixed or adjustable | Usually adjustable (variable) |
| Payments | A set schedule from the start | Vary with the balance and rate; may be interest only during the draw period |
| Borrow again after repaying? | No | Yes, during the draw period |
| Interest charged on | The full amount borrowed | Only what you've drawn |
| Secured by your home? | Yes | Yes |
If you already have a mortgage, either one is a second mortgage: a separate loan with its own payment on top of your first mortgage.
How much can you borrow? CLTV
Lenders look at your combined loan-to-value ratio (CLTV): all the loans secured by the home compared with its value. Fannie Mae defines CLTV as the first mortgage plus the drawn HELOC balance plus any other subordinate loans, divided by the lower of the sales price or appraised value.
Each lender sets its own maximum CLTV for home equity lending, and it can vary with your credit score and the property. Example with an 85% maximum (an example figure): a $400,000 home with a $250,000 mortgage can carry $340,000 of total debt, so the most you could borrow is $90,000.
When each one fits
- Home equity loan: one known expense, such as a roof replacement or consolidating a fixed amount of debt, where you want a fixed payment you can budget for.
- HELOC: costs spread over time or uncertain amounts, such as a renovation paid in stages, or a safety-net line you may not fully use.
Worked example
You need $50,000. With a home equity loan at 8% for 15 years (an example rate), the payment is fixed at $477.83 a month from the start. With a HELOC at 8%, interest only on $50,000 is $333.33 during the draw period, then about $418 over a 20-year repayment period, and more if the rate rises. Compare them with the home equity loan calculator and the HELOC calculator.
Comparing interest rates on home equity loans
A home equity loan's APR includes many fees, while a HELOC's APR doesn't include fees, so the CFPB says the two APRs aren't directly comparable. Compare the rate, the fees and the total cost over the time you expect to owe the money. The APR calculator shows how fees change the true cost of a loan.
The risk to your home
Both loans are secured by your home. If you fall behind, the lender can foreclose, even if your first mortgage is current. HELOC lenders can also freeze or cut your line if your home's value falls. If you're having trouble paying your mortgage, the CFPB suggests talking to a housing counselor before borrowing more against the home.
Alternatives
A cash-out refinance replaces your mortgage with a bigger one. It can make sense if the new rate is close to your current one; use the refinance calculator to compare. Interest on any of these is deductible only if you itemize and use the money to buy, build or substantially improve the home (IRS Publication 936).
Sources: CFPB: home equity loan vs HELOC; CFPB: interest rate vs APR; Fannie Mae Selling Guide B2-1.2-02 (CLTV); IRS Publication 936.
Every worked example on this page was checked with Calcist's own engine and an independent reference.