HELOC vs Home Equity Loan: How to Choose in 2026

If your first mortgage carries a rate from a few years ago, a cash-out refinance means giving up that rate to tap your equity. A HELOC or a home equity loan lets you borrow against the same equity while leaving the first mortgage in place. The two products are often lumped together, yet they behave differently in how you receive the money, how the rate works, and how the payment changes over time. Choosing well depends on the project you are funding, how long you need the money, and how much interest-rate risk you are willing to carry.

How a HELOC and a home equity loan each work

A home equity line of credit (HELOC) is a revolving credit line secured by your home. The lender approves a maximum credit limit. During the draw period (commonly 10 years), you can borrow, repay, and borrow again, much like a credit card. Some HELOCs allow interest-only payments during the draw period; others require principal payments too. HELOCs usually have a variable rate based on an index, often Prime, plus a lender-set margin. When the draw period ends, the line enters a repayment period (commonly 10 to 20 years) in which no new draws are allowed. Many plans amortize principal and interest, but some require a balloon payment of the remaining balance.

A home equity loan (HEL), sometimes called a second mortgage or a closed-end second, is an installment loan. You receive the money in one lump sum after closing and any applicable cancellation period. The rate is usually fixed and the term is set up front. With a fixed-rate loan, the principal-and-interest payment stays the same for the life of the loan. Available terms depend on the lender; U.S. Bank, for example, advertises terms up to 30 years.

Both products use your home as collateral. When added behind an existing first mortgage, they are second liens. You must keep making the first-mortgage payment as well as the new payment, and failure to repay can put your home at risk.

Typical qualifying requirements

Underwriting varies by lender. The examples below are published consumer terms, not universal requirements or lender recommendations.

Combined loan-to-value (CLTV). Lenders compare the total mortgage debt with the home’s value. For a HELOC, ask whether the calculation uses the full credit limit rather than just your initial draw. Limits around 80% to 85% appear in lender programs, with higher limits available under some terms. Bank of America generally allows a HELOC up to 85% of home value minus the mortgage balance. Rocket Mortgage publishes home equity loan limits of 80%, 85%, or 90%, depending on credit score.

Credit score. Bank of America advertises a minimum score of 660 for its HELOC. Rocket’s home equity loan tiers require at least 680 for 80% CLTV, 700 for 85%, and 740 for 90%. Meeting a score threshold does not guarantee approval or a particular rate.

Debt-to-income ratio (DTI). DTI compares monthly debt payments with gross monthly income. Rocket publishes a maximum of 50% for its home equity loan. Ask each lender for its own limit and the HELOC payment it uses to qualify you. An interest-only minimum payment does not show what repayment of principal will eventually cost.

Documentation. Be ready to document income and assets. Ask for the lender’s checklist for your employment type, including any pay stubs, tax returns, bank statements, mortgage statement, and insurance information it needs. Also ask how the lender will establish the home’s value and whether an appraisal fee applies.

Occupancy and property. Confirm that the lender accepts your property type and occupancy before applying. Do not assume that terms advertised for a primary residence also apply to a second home, rental property, condo, or manufactured home.

Closing costs and ongoing fees

HELOCs and home equity loans can involve application fees, title work, recording fees, and an appraisal. Some lenders waive some or all upfront costs. Compare written disclosures rather than assuming one product always costs less to close.

HELOCs may have annual maintenance fees, transaction fees, or other charges even when you are not actively borrowing. A no-closing-cost offer does not settle every fee question. Ask whether closing the account early triggers a charge or repayment of costs the lender covered.

Home equity loans can also come with waived closing costs. U.S. Bank advertises no-closing-cost options for eligible loans, while its disclosures warn that some fees may still apply. Get a dollar estimate for your loan rather than relying on a percentage planning range.

Ask each lender for a written fee schedule before you choose. Compare the rate alongside fees, annual charges, and any early-closure terms over the time you expect to keep the debt.

Rate structure and how payments actually look

A HELOC rate is usually variable. The lender adds a margin to an index, such as the Wall Street Journal Prime Rate. Your agreement specifies the index, adjustment schedule, and rate limits. An index change affects your rate according to that schedule. Some lenders offer a fixed-rate conversion option that lets you lock part of the balance at a fixed rate for a set term while the rest of the line stays variable.

With a fixed-rate home equity loan, the rate is set at closing and the principal-and-interest payment is level for the full term. You do not benefit if rates fall, but you are also insulated from rate increases.

The payments below use the same loan amount and the same assumed rate to show the structural difference. These rates are illustrative only, not quotes. Current second-lien pricing varies by lender, credit tier, CLTV, and occupancy.

Assumptions for both examples: $50,000 borrowed, owner-occupied primary residence, 8.50% hypothetical starting annual interest rate, no points or fees, and no taxes, homeowners insurance, or mortgage insurance included. The HELOC assumes a 10-year interest-only draw period, no additional borrowing or principal repayment, and a $50,000 balance at the start of its 20-year repayment period. The home equity loan has a 15-year term. Interest-only figures use annual interest divided by 12; actual billing may use daily balances.

• HELOC, interest-only during draw at 8.50%: about $354 per month in interest. The payment changes if the contractual rate changes. A 1-point rise to 9.50% raises the interest-only payment to about $396. A 2-point rise to 10.50% raises it to about $438.
• HELOC, fully amortizing over a 20-year repayment period at 8.50%: about $434 per month in principal and interest. This is what the payment looks like after the draw period ends if the rate is unchanged.
• Home equity loan, 15-year fixed at 8.50%: about $492 per month in principal and interest for the full term.

In this example, the interest-only HELOC starts with the lowest monthly payment because it does not repay principal. The fixed-rate home equity loan starts higher and pays down the balance from the beginning. A smaller payment does not by itself mean a lower total borrowing cost.

Which product fits which purpose

Match the product to the cash-flow shape of what you are financing.

Pick a home equity loan when:

• The amount is known up front, such as a single large renovation bid, a specific debt-consolidation balance, or a one-time medical bill.
• You want a fixed payment you can budget around for years.
• You expect rates to rise and want to lock a rate at closing.
• The money will be used all at once and not re-borrowed.

Pick a HELOC when:

• The project is staged over months or years, such as a phased remodel paid as each contractor finishes.
• You want a standby reserve for a known upcoming expense whose timing is uncertain, such as college tuition over four years or a planned business purchase.
• You expect to repay chunks of principal quickly and want to re-borrow later without a new application.
• You are comfortable managing a variable payment and have room in your budget if the rate climbs.

For a staged renovation, a HELOC with an interest-only draw period lets you pay interest on the amount drawn while work is in progress. Fees may still apply. For a one-time roof replacement, a fixed-rate lump sum may fit a budget that needs payment certainty.

A deeper walkthrough of renovation financing options sits in our guide to home improvement loans.

What about a cash-out refinance

A cash-out refinance replaces your first mortgage with a larger loan and provides cash from the difference, after costs. It also replaces the rate and terms on the existing balance. Compare the combined payments, fees, and repayment terms before giving up a low-rate first mortgage. For a side-by-side, see cash-out refinance vs HELOC.

Risks worth taking seriously

The home is collateral. A missed payment on either product can lead to foreclosure. This is the same risk you accept on your first mortgage, but a second lien does not change it.

Variable-rate exposure (HELOC). If your rate rises, your payment can rise according to the agreement’s adjustment schedule. Say you have a hypothetical $100,000 balance during an interest-only draw period, with no fees or principal payments. At an assumed 8.50% annual rate, monthly interest is about $708. At 10.50%, it is about $875. These figures use annual interest divided by 12 and exclude taxes, homeowners insurance, and mortgage insurance. Check the agreement’s rate cap, floor, and adjustment terms.

Payment shock at the end of the draw period. Payments can rise when principal repayment begins, even without a rate increase. Using the same hypothetical $100,000 balance and 8.50% rate, with no fees or further draws, a 20-year amortization requires about $868 per month in principal and interest instead of $708 in interest only. Taxes and insurance remain excluded. Some contracts instead require a balloon payment. Plan for your contract’s repayment terms well before the draw ends.

Frozen or reduced lines. A lender can restrict further draws under specified conditions, including a significant decline in home value or a material change in finances that gives it reason to believe you cannot meet the payment terms. Do not treat the undrawn portion as guaranteed emergency cash.

Tax deductibility of the interest

For the home mortgage interest deduction, interest on a HELOC or home equity loan qualifies only when the loan proceeds are used to buy, build, or substantially improve the home that secures the loan, and only to the extent the taxpayer itemizes on Schedule A. Interest on proceeds used for personal expenses such as credit card bills, a car purchase, tuition, or a vacation does not qualify for this mortgage deduction. Separate rules can apply to business or investment uses.

The deduction is also subject to the overall acquisition-debt cap. For loans taken out after December 15, 2017, the cap is $750,000 of total acquisition debt ($375,000 if married filing separately), combined across the first mortgage and any qualifying second-lien balance. Older qualifying acquisition debt can have a $1 million limit ($500,000 if married filing separately), subject to transition and refinancing rules. Older debt also reduces the limit available for newer borrowing. See IRS Publication 936 for the full rules and mixed-use calculations.

If you draw a HELOC in multiple pieces for different uses, keep records that tie each draw to its purpose. The deductible fraction is based on the use of the proceeds, not the structure of the loan.

The 2025 law made the $750,000 limit and the exclusion for home equity debt used for other purposes permanent, effective for tax years beginning after December 31, 2025. These rules therefore continue in 2026; they do not depend on waiting for the final 2026 Publication 936. See Public Law 119-21, section 70108.

Putting it together

If you want certainty, pick the home equity loan. One payment, one rate, one date it is paid off.

If you want flexibility and are willing to manage a variable rate, pick the HELOC. Draw what you need as you need it and only pay interest on the outstanding balance.

For a variable-rate HELOC, test your budget against a 2-percentage-point increase and the contract’s maximum rate, as well as principal repayment after the draw period. For a fixed-rate loan, check that the scheduled payment fits alongside your first mortgage and other bills. For current second-lien rates and lender comparisons, see our pages on HELOCs and home equity loan rates and requirements.