HELOC vs. Home Equity Loan: What Are the Differences?
Learn how home equity loans and HELOCs differ in structure, rates and repayment so you can choose the right option for your borrowing needs.
What is home equity, and how does it work?
As you continually pay down your mortgage, or your property’s value increases, your home equity grows. That equity can be used as collateral to secure financing for large expenses or strategic investments like home renovations, education costs or debt consolidation.
Both home equity loans and home equity lines of credit (HELOCs) allow you to borrow against the value of your property but work differently when it comes to access, interest rates and repayment.
What is a home equity loan?
A home equity loan, sometimes referred to as a “second mortgage,” give you a lump-sum payment that you’ll repay over a fixed term. Home equity loans are also typically locked in at a fixed interest rate, so your monthly payment amount will remain consistent for the entirety of the loan.
Because the loan is secured through your home’s equity, rates are often more competitive than personal loans or credit cards. Home equity loans may be ideal for borrowers who …
- Need a specific amount of capital upfront (for example, to complete a home renovation or pay off high-interest debt).
- Prefer predictable monthly payments.
- Want to lock in a fixed rate that won’t change with the market.
What is a HELOC (home equity line of credit)?
A home equity line of credit, or HELOC, functions more like a credit card that’s secured by your home’s equity. Instead of receiving a lump sum payment, as in a home equity loan, a HELOC gives you maximum line of credit that you can draw from as needed. A HELOC is the preferred option in most situations.
Many HELOCs have a timeline in which you can withdraw money—a draw period—which typically falls between five and 10 years. During the draw period, many HELOCs require interest-only payments, though some may require partial principal payments. Once the draw period ends, you’ll begin repaying the outstanding balance of principal and interest based on the terms of your loan agreement.
Unlike a home equity loan that has a fixed interest rate, HELOC interest can fluctuate based on the market rates so your payments may vary. However, this makes HELOCs useful for ongoing projects or expenses that occur over time, such as home improvements or education costs.
HELOC vs. home equity loan: Key differences
Although home equity loans and HELOCs both use your home’s value as collateral, they work differently in how you access and repay funds. Understanding these distinctions can help you decide which best fits your needs and comfort level.
A home equity loan provides a one-time, lump-sum payment that you repay in fixed monthly installments over a set term. This offers predictability and consistency, making it easier to plan your monthly budget or secure competitive market rates.
A HELOC, on the other hand, acts as a revolving line of credit with a variable APR. You can borrow as needed (up to your approved limit) during a set draw period, and you’ll only pay interest on the amount you use.
How fees and interest work for home equity loans and HELOCs
Both types of borrowing typically involve costs beyond the interest rate. Lenders will usually charge fees for applications, appraisals or closing, similar to the fees that come with a mortgage.
- Home equity loans often carry a fixed APR that includes both the interest rate and certain credit costs.
- HELOCs may have a variable APR that can change with market conditions. This rate generally only covers interest; you may still have financing or maintenance fees.
Before you start, always thoroughly review the disclosure materials your lender provides. By law, lenders must outline all important terms and costs for HELOCs, including how your rate is determined, when payments begin and any other fees associated with opening or maintaining the account.
Before you borrow with home equity
Before signing a home equity loan or HELOC, carefully review all the closing documents to ensure the terms all match what was disclosed earlier. If anything seems different or unclear, don’t sign until you’ve confirmed the details.
Be extra cautious of any last-minute emails or urgent messages requesting changes to where funds should be sent; these could be a scam. Always confirm any instructions directly with your lender or real estate professional using verified contact information.
If you’re using your primary home as collateral, you generally have three business days after closing to cancel the agreement for any reason and without penalty. You’ll receive written disclosures explaining this right and how to exercise it. Your lender typically can’t change your loan terms, close your account or demand early repayment as long as you make payments as agreed. However, if your home’s value drops or your financial circumstances change, your lender may temporarily reduce or freeze a HELOC.
Borrowing responsibly
A home equity loan or line of credit can be a powerful financial tool when used wisely. Borrow only what you need and can comfortably repay. Make sure you think through how the payments fit into your overall budget, long-term goals and any other factors that may affect your borrowing.
Because your home secures the loan, missing payments could put your property at risk of foreclosure. This is why it’s critical to review all disclosures, ask questions and consider consulting a trusted financial advisor before you commit.
By understanding the terms and using your home’s equity thoughtfully, you can make confident borrowing decisions that support your financial future.
Explore home equity loan and HELOC options with Associated Bank and find a solution that may fit your financial goals.
HELOC vs. Home Equity Loan FAQs
How do I know whether a HELOC or a home equity loan is better for me?
It depends on how you plan to use the funds. A home equity loan may work best if you know exactly how much money you need upfront and want predictable, fixed payments. A HELOC offers more flexibility, letting you borrow as needed during a set draw period, which is ideal for projects or expenses that unfold over time.
Can I lose my home if I don’t repay a HELOC or home equity loan?
Yes. Both products use your home as collateral, which means the lender could foreclose if you don’t make payments as agreed. It’s important to borrow only what you can comfortably repay and to review all loan terms before signing.
Are there fees or closing costs with these types of loans?
Typically, yes. Both home equity loans and HELOCs can include fees such as appraisals, applications and closing costs, similar to a traditional mortgage. Your lender will provide written disclosures detailing all costs, rates and repayment terms before closing.
What happens if my home’s value changes after I open a HELOC?
If your home value drops significantly, your lender may temporarily reduce or freeze your available line of credit. This safeguard helps prevent overborrowing against your home’s equity. If that happens, you can discuss options with your lender or explore other financing solutions.
Do I have the right to cancel a home equity loan or HELOC?
In most cases, yes. If you’re using your primary residence as collateral, federal law gives you three business days after closing to cancel the loan for any reason and without penalty. Your lender will provide written instructions explaining this right and how to exercise it.
No fee will be assessed when converting to a fixed-rate option. If there is a current fixed-rate option that is requested to be unlocked, a $100 fee will apply. The fixed-rate option can primarily be done in person at an Associated Bank branch or by calling 1-866-LEND ABC (536-3222). (1331)
Loan products are offered by Associated Bank, N.A., and are subject to credit approval and involve interest and other costs. Please ask about details on fees and terms and conditions of these products. Property insurance and flood insurance, if applicable, will be required on collateral. (1050)