HELOC vs. Home Equity Loan: Costs, Risks and Which Fits Your Plan
How each product works, what you can borrow, how rates are set after the Fed's September 2026 hike, what the payments look like and when the interest is tax deductible.
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Key takeaways
- Home equity loan: lump sum, fixed rate, fixed payments. Best for a one-time cost with a known price.
- HELOC: revolving line, usually a variable rate tied to the prime rate (7.00% since September 17, 2026), with a draw period of often 10 years.
- Lenders usually let you borrow up to 80% to 85% of your home's value, minus what you owe.
- Interest is deductible only if the money is used to buy, build or substantially improve the home, and only if you itemize.
- Both are secured by your house: missed payments can lead to foreclosure.
Many homeowners have more equity than ever, and many also have a first mortgage at a rate they do not want to give up. That makes a second loan on top of the existing mortgage attractive. The two main options look similar but behave very differently once rates move.
Please note
Rates as of early October 2026 and example figures for illustration. Your rate depends on credit, combined loan-to-value, lender and state. General information, not individual advice.
How each product works
| Home equity loan | HELOC | |
|---|---|---|
| How you get the money | One lump sum at closing | Draw as needed up to a limit |
| Rate | Usually fixed | Usually variable (prime plus a margin); some offer fixed-rate portions |
| Payments | Fixed principal and interest from the start | Often interest-only during the draw period, then principal and interest |
| Typical term | 5 to 30 years | Draw period often 10 years, repayment up to 20 years |
| Closing costs | Similar to a mortgage, often a few percent | Often lower; some lenders waive them, sometimes with an annual fee |
| Best for | One known expense | Ongoing or uncertain costs, such as a phased renovation |
How much you can borrow
Lenders look at your combined loan-to-value ratio (CLTV): the first mortgage plus the new loan, divided by the home's appraised value. Many cap it at 80% to 85%, some go to 90% for strong borrowers.
Example
Your home is worth $400,000 and you owe $250,000. At an 80% CLTV limit, you could borrow up to $70,000 (80% of $400,000 = $320,000, minus $250,000). At 85%, up to $90,000.
How rates are set right now
HELOC rates are typically the prime rate plus a margin. The prime rate rose to 7.00% on September 17, 2026, the day after the Federal Reserve raised its target range to 3.75% to 4.00%, so many HELOCs now carry rates in the 7.5% to 9% range depending on credit and CLTV. Every future Fed move passes through to a variable HELOC within a statement cycle or two. Home equity loans lock a rate at closing, typically somewhat higher than an introductory HELOC rate but immune to later increases.
What the payments look like
| Borrowing $50,000 | Monthly payment |
|---|---|
| HELOC, interest-only at 7.5% | $312.50 |
| HELOC, interest-only if the rate rises to 8.5% | $354.17 |
| HELOC repayment phase, 7.5% over 20 years | $402.80 |
| Home equity loan, fixed 8.0% over 15 years | $477.83 |
The HELOC's interest-only phase feels cheap but reduces nothing. When the draw period ends, the payment jumps because principal repayment begins. The fixed loan costs more per month from day one but pays the debt off on schedule, with total interest of about $36,000 over 15 years in this example.
Tax treatment
Interest on either product counts as deductible mortgage interest only if the money is used to buy, build or substantially improve the home that secures the loan, and only within the overall $750,000 limit on mortgage debt, a rule the 2025 tax law made permanent. Using home equity for a car, tuition or credit card debt makes the interest non-deductible. You also need to itemize to benefit; see mortgage interest and PMI deductions in 2026.
Risks to weigh
- Your home is the collateral. Converting unsecured debt into home-secured debt raises the stakes if your income drops.
- Rate risk on HELOCs: payments rise with the prime rate.
- Frozen lines: lenders can reduce or freeze a HELOC if your home's value falls significantly or your finances change.
- Selling costs: both loans must be repaid when you sell.
For primary residences, federal law gives you a three-business-day right of rescission after closing a home equity loan or HELOC, letting you cancel without penalty.
When a cash-out refinance is better
If your first mortgage rate is higher than current rates, replacing it with a larger new mortgage can beat a second loan. If your first-mortgage rate is low, a HELOC or home equity loan keeps that low rate on most of your debt. Run the comparison in when to refinance your mortgage.
Frequently asked questions
Is a HELOC or a home equity loan better for a renovation?
A HELOC suits projects paid in stages or with uncertain costs; a home equity loan suits a fixed-price project when you want payment certainty.
Can I use home equity to pay off credit cards?
You can, and the rate is usually lower, but you turn unsecured debt into debt secured by your house and the interest is not deductible. Compare with a debt consolidation loan first.
What credit score do I need for a HELOC?
Many lenders look for scores around 680 and above, with the best terms at higher scores and lower CLTVs.
Does a HELOC affect my credit score?
Applying adds a hard inquiry, and a high balance relative to the limit can weigh on scoring models. On-time payments help over time.
How long does it take to get a home equity loan?
Often two to six weeks, mainly for the appraisal and title work.
