Home equity loan vs. line of credit | finder.com

Home equity loan vs. line of credit

Tap the equity you've built in your home for major or ongoing expenses.

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Chances are, your home is your biggest financial asset. As you pay down your mortgage, you build equity that you can then put to work through a home equity loan or HELOC. Both loans use your home as collateral, which can be a powerful motivator for timely repayments. But how you access your cash depends on the loan you choose.

How does a home equity loan differ from a line of credit?

Both loans offer unrestricted financing backed by the equity in your home. And how much you can borrow typically tops out at 80% to 95% of your home equity, depending on your credit score.

But they differ in how you access your equity and pay back what you borrow.

Home equity loan vs line of credit comparison table

Home equity loansHELOCs
Typical eligibility
  • At least 15% equity in home
  • 43% to 50% debt-to-income ratio
  • 620 or higher credit score
  • Ability to repay based on income, assets, expenses and credit history
  • At least 20% equity in home
  • 43% to 50% debt-to-income ratio
  • 620 or higher credit score; 720+ for the strongest rates
  • Ability to repay based on income, assets, monthly expenses and credit history
Interest rateFixedVariable, though some lenders allow conversion to a fixed rate
Access to fundsLump-sum paymentWithdraw money as you need it, paying interest on the amount you draw
Use of fundsNo restrictionsNo restrictions
Term lengthsTypically 5 to 15 yearsDraw period: Typically 5 to 10 years
Repayment period: Typically 10 to 25 years
Closing costsYesVaries
CollateralHomeHome
Apply

What are the benefits of a home equity loan and a line of credit?

Each loan allows you to access a major asset — your home — and use the cash to pay for anything you need.

Home equity loansHELOCs
  • Fixed interest rate. Your payments stay steady, even if the Federal Reserve raises interest rates.
  • Set payment schedule. Along with predetermined rates, makes for easier budgeting.
  • Lump-sum payment. Use the money for college, medical care or whatever you’d like.
  • Looser eligibility. To apply, you need at least 15% equity in your home and a credit score of 620.
  • Flexible borrowing. Just like a credit card, withdraw the cash when you need it.
  • Delayed interest. You don’t pay interest until you access the money. Even then, it’s only on what you borrow.
  • Low or no closing costs. Some lenders cover the application and appraisal fees — but read the fine print of your loan.
  • Quick approvals. If you need cash now, a HELOC is fairly easy to obtain.
  • Fund access. Withdraw money through a check or card linked to the HELOC.

What are the drawbacks of a home equity loan and line of credit?

With both loans, the biggest drawback is that your home is on the line. If you don’t meet the requirements set out in your agreement, your lender can seize your property as payment.

Home equity loansHELOCs
  • Multiple monthly payments. It’s a second mortgage, which means you’ll need to keep track of two loans and make two separate repayments.
  • Closing costs. You face the same closing costs as a traditional mortgage, though you may be able to roll them into your loan.
  • Higher interest rates. The security of a fixed rate results in weaker rates than a HELOC.
  • Risk of property depreciation. If home values in your area decline, you could end up owing more than your home is worth.
  • Unpredictable interest rates. HELOCs are pegged to the prime rate. As rates rise, so do your monthly payments.
  • Strict credit requirements. You’ll need a score of at least 620 to qualify and 720 for the strongest rates.
  • Harder to manage. You must be disciplined to avoid paying a lot for principal and interest during the repayment period.
  • Additional fees. You may pay annual membership, maintenance or transaction fees for each withdrawal. Most lenders also charge fees for late or missed payments, which can increase the amount you owe.

Which option is better suited for me?

When you’re deciding between a home equity loan and a HELOC, think about why you want to borrow money.

Home equity loans are ideal for one-time expenses — like a kitchen remodel — and for those who prefer predictable payments. You’ll get a lump sum and pay it back with fixed monthly payments for a set period of time.

If your expenses are expected to increase over time — like with medical bills and college tuition — you might want to look into a HELOC. You’ll have the flexibility to access funds as you need them, and you’ll pay interest only on the amount you withdraw.

Why we like:

Fast turnaround and competitive fixed rates for qualified borrowers with only an origination fee.

  • Competitive rates.
  • Low fees.
  • Quick preapproval.

Why we like: Figure

Fast turnaround and competitive fixed rates for qualified borrowers with only an origination fee.

  • Get preapproved without a hard credit pull.
  • Loan terms of 5, 10, 15 and 30 years.
  • Borrow up to 95% of the value of your home.
  • Minimum credit score: 600

Name Product Max LTV Min. credit score State availability
80%
620
Available in all states
Connect with vetted lenders quickly through this free online marketplace.
95% (CLTV)
600
Not available in: AK, DE, HI, IA, KY, MD, NY, SC, TX, UT, VT, VA, WV
Fast turnaround and competitive fixed rates for qualified borrowers with only an origination fee.

Compare up to 4 providers

Name Product Max LTV Min. credit score State availability
80%
620
Available in all states
Connect with vetted lenders quickly through this free online marketplace.
95% (CLTV)
600
Not available in: AK, DE, HI, IA, KY, MD, NY, SC, TX, UT, VT, VA, WV
Fast turnaround and competitive fixed rates for qualified borrowers with only an origination fee.

Compare up to 4 providers

Bottom line

If you need cash, you may be able to use your home as collateral with a home equity loan or line of credit. Home equity loans are best for financing a project with a fixed cost, while HELOCs give you flexible access to your money over time.

Borrowing against the equity in your home is not a decision to be taken lightly. Before committing, compare home loan lenders and weigh the benefits against any drawbacks.

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