HELOC vs. home equity loan: Which is best for you?

A home equity loan¹ and a home equity line of credit (HELOC) are both financing options for homeowners who are looking to borrow money. Both are types of second mortgages that allow homeowners to borrow against their equity to get better loan terms. If you choose one of these options, you’ll need to keep up with an additional payment each month alongside your primary mortgage – or risk losing your home.

While both home equity loans and HELOCs allow you to borrow against your home equity, they have key differences when it comes to flexibility, interest rate, and repayment structure. Here, we’ll break down the key differences between HELOCs and home equity loans to help you choose the best option for your situation.

Key takeaways:

• A home equity loan gets you a single lump-sum payout upfront, while a HELOC provides a revolving line of credit that you can draw from as needed during a designated draw period.
• Home equity loans have fixed interest rates that provide predictable, steady monthly payments, while HELOCs typically carry variable interest rates that fluctuate over time based on the market.
• Home equity loans can be helpful for one-time expenses with known upfront costs – like a renovation – while HELOCs work for ongoing or unpredictable costs.

Quick answer: HELOC vs. home equity loan

The primary difference between a HELOC and a home equity loan is how you receive and repay your funds.

A HELOC operates like a credit card. You borrow as needed up to an approved limit, pay interest only on what you spend during a draw period, and face variable interest rates.

A home equity loan operates like a traditional installment loan. You receive a one-time cash lump sum upfront and repay it in fixed, equal monthly installments at a fixed interest rate.

How does home equity work?

Equity is the portion of your home’s value that you own, as opposed to what you still owe on it. To calculate the amount of equity you have in your home, you take the current property value and subtract what you still owe on your mortgage.

Home Equity = Current Appraised Value - Mortgage Balance

With each mortgage payment you make, you build equity in your home. You can also build equity if the value of your property increases.

Once you’ve built up enough equity, you can use it as collateral to borrow money. Lenders typically require that you have at least 15% – 20% equity before you can tap into it. This type of secured loan can get you access to lower interest rates than other types of loans. However, using your home as collateral also means that if you can’t repay the loan, you could risk foreclosure on your home.

You can use the money you borrow for whatever purposes you wish. Common reasons homeowners borrow against their equity include home renovations, tuition, paying down debt, or unexpected medical expenses.

What is a HELOC?

A HELOC is a type of second mortgage that allows you to borrow money against the equity in your home as a line of credit up to a certain amount. You can use the equity in your home to pay for whatever you need, such as home improvements, education, and credit card debt consolidation. You can typically borrow up to 80% – 85% of your home’s value, including what you still owe on the primary mortgage.

Rocket Mortgage does not currently offer HELOCs, but we do offer a Home Equity Loan.

How a HELOC works

There are two phases with a HELOC – the draw period and the repayment period.

• Draw period (typically 10 years): Your line of credit is open and available for you to use as needed. During the draw period, the only payments you’re required to make are interest payments on any money borrowed.
• Repayment period (typically up to 20 years): Once you reach the end of your draw period, you’ll have to make repayments based on your principal and remaining interest. The amount you owe each month will depend on your interest rate and how much you borrowed.

HELOCs typically come with a variable interest rate. This means that the interest rate on your loan will start off lower for an introductory period. Once that period is over, your interest rate will change at a regular interval and can fluctuate based on changes in the market.

HELOC pros and cons

Here we’ll look at the pros and cons of a HELOC.

Advantages of HELOCs include:

• Borrow flexibly: Draw as much or as little cash as needed up to your credit cap.
• Pay interest only on used funds: You do not owe interest on unused credit.
• Lower initial payments: Interest-only requirements keep monthly payments low during the draw period.
• Reusable credit line: Repaying principal during the draw period restores your available credit.

However, beware of the following drawbacks to HELOCs:

• Variable interest rate risks: Monthly payments can rise if broader market interest rates increase.
• Payment shock: Monthly obligations jump significantly when entering the principal repayment period.
• Risk of overspending: Easy revolving access can tempt borrowers into taking on excessive debt.
• Potential account fees: Some lenders charge annual maintenance fees, draw charges, or early cancellation penalties.

What is a home equity loan?

Home equity loans are another type of second mortgage that allow you to use the equity in your home as collateral to borrow money. Your lender lends you money as a lump sum when you take out the loan, and you make your monthly payments during a repayment period.

Home equity loans typically come with a fixed interest rate that doesn’t change over the life of your loan. Because you’re borrowing a lump sum at a fixed interest rate, you’ll have predictable, even monthly payments as you repay the loan.

As with a HELOC, you can typically borrow up to 80% – 85% of the value of your home, minus what you owe on your mortgage. The Home Equity Loan option from Rocket Mortgage allows you to access $45,000 – $350,000 of your home’s equity in your choice of 10-, 15-, 20-, and 30-year terms.

Home equity loan pros and cons

Now let’s look at some of the upsides and downsides to home equity loans.

Some of the pros of home equity loans are:

• Fixed interest rates: Your interest rate stays locked for the entire life of the loan.
• Predictable monthly payments: Equal, stable payments make long-term household budgeting simple.
• Upfront lump sum: Receive full capital immediately for major purchases or consolidation.
• No payment shock: Principal and interest repayment begins on month one, preventing sudden rate jumps.

However, home equity loans also have drawbacks, including:

• Immediate interest on full balance: You pay interest on the full approved loan amount from day one, whether you spend it immediately or not.
• Inflexible borrowing limits: You cannot draw additional funds later without applying for a new loan.
• No auto-savings if market rates drop: Fixed rates will not decline automatically if market interest rates fall.

HELOCs and home equity loans: Key differences

Let’s also look at the differences between a HELOC and a home equity loan:

Type of loan

A HELOC is a type of revolving debt, which means that if you don’t pay the balance on your revolving credit account in full every month, the unpaid portion carries over into the next month. A home equity loan is an installment loan that you repay over time with regularly scheduled payments.

How you get the funds

A home equity loan delivers your entire approved balance in a single bank transfer at closing. A HELOC establishes a standing credit line that you access via checks, linked cards, or online transfers throughout the draw period, which is typically 10 years.

How interest rates compare

A home equity loan has a fixed interest rate, which means it won’t change over the life of your loan. A HELOC has a variable interest rate that fluctuates based on an underlying benchmark index or interest rate. If interest rates increase across the economy, your HELOC rate and monthly payment will rise accordingly.

How repayment and payments compare

With a home equity loan, repayment begins immediately upon funding. With a HELOC, you pay interest only on the specific funds drawn during the 10-year draw window. However, once the draw window closes, payments increase to cover both principal amortization and interest over the remaining 10 to 20 years.

Example: $50,000 home equity loan vs. $50,000 HELOC

Let’s say you need to borrow $50,000 and are trying to decide between a home equity loan and a HELOC.

• $50,000 home equity loan: You receive $50,000 cash at closing. If locked at a fixed rate, you make steady, identical monthly payments (for example, $450/month) from month one through year 15 or 20 until the balance reaches zero.
• $50,000 HELOC: You are granted a $50,000 credit limit. If you only draw $10,000 in year one for initial repairs, you pay variable interest only on that $10,000. You can draw the remaining $40,000 years later or leave it untouched. Once the 10-year draw period ends, your monthly payment adjusts to amortize whatever total balance remains.

Best used for

A home equity loan makes sense when you have a known one-time expense where costs are fixed upfront. For example, you could use it to pay off $30,000 in credit card debt or complete a kitchen remodel.

A HELOC can be more useful for multi-stage projects with uncertain overall expenses, such as multiple home upgrades over several years or recurring college tuition installments.

HELOC and home equity loan requirements and costs

To get approved for a HELOC or home equity loan, you’ll need to meet certain requirements:

• Equity: Most lenders will require that you have at least 15% – 20% equity in your home to get a HELOC or home equity loan.
• Credit score: You’ll typically need a minimum credit score of at least 620 to get a home equity loan or HELOC. Some lenders require a minimum credit score of 680.
• Debt-to-income ratio (DTI): Your debt-to-income ratio is your fixed monthly debt divided by your gross monthly income, turned into a percentage. For both a HELOC and a home equity loan, most lenders will require that your DTI not exceed 43%.
• Appraisal: To get a home equity loan or HELOC, you’ll need to have your home appraised to determine the fair market value of your home. Luckily, these appraisals tend to be less involved than the appraisal you needed to purchase your home and can often be done virtually.
• Closing costs: Closing costs for HELOCs and home equity loans tend to range from 3% – 6% of the total loan amount.

Which is easier to get: a HELOC or a home equity loan?

Neither option is inherently easier to obtain because both require similar credit scores, income verification, DTI ratios, and appraisal checks. Approval depends on your individual financial profile and equity position rather than the specific product selected.

How closing costs and fees compare

Closing costs for both home equity loans and HELOCs typically range from 3% – 6% of the total loan or credit limit. These fees cover appraisal costs, title searches, origination fees, and filing charges. Rocket Mortgage does not charge origination fees on Home Equity Loans².

Risks to consider

Borrowing against your home equity carries specific risks:

• Foreclosure risk: Because your home secures the loan, failing to make monthly payments on either your primary or second mortgage can result in foreclosure.
• Second monthly payment: Adding another mandatory debt obligation increases your monthly financial overhead.
• Variable rate volatility: HELOC rates can rise significantly over time, which could result in a much larger minimum monthly payment.
• Reduced net equity: Tapping equity lowers your net proceeds when you eventually sell your property.

HELOC vs. home equity loan: Which is right for you?

If you’re trying to decide between a home equity loan and a HELOC, the answer will depend on how you’re using the money and how you’d prefer to repay it.

When to choose a HELOC

If you prefer borrowing cash on a revolving basis or aren’t sure exactly how much you’ll need to borrow in advance, a HELOC could work well for you. For example, if you’re using it to pay tuition and schooling costs, you may prefer to have a line of credit you can draw on multiple times. A HELOC can also be helpful to homeowners who are looking to perform phased home renovations and don’t know in advance exactly how much it will end up costing.

When to choose a home equity loan

If you need a large sum of cash to pay off debt or cover a large emergency expense, a home equity loan might be right for you. For example, you might want to remodel your kitchen, and your contractor has given you a specific quote. Home equity loans also come with a fixed interest rate and predictable monthly payments.

When to consider a cash-out refinance

A cash-out refinance³ is an alternative financing option that also allows homeowners to borrow money against their home equity. With a refinance, your current mortgage is replaced by a new, larger loan, and you withdraw the difference in cash. If interest rates have dropped since you first took out your mortgage, a cash-out refinance can be a helpful way to borrow money and reduce your interest rate.

However, the opposite is true if interest rates have increased. A cash-out refinance also typically comes with higher closing costs and can mean it takes longer for you to pay off your mortgage

FAQ

Let’s look at the answers to some frequently asked questions about home equity loans and HELOCs.

Which is better, a HELOC or a home equity loan?

HELOCs and home equity loans each come with their own sets of pros and cons. A home equity loan is often better if you want to borrow a lump sum at a fixed interest rate. A HELOC can be the right choice if you want a line of credit you can draw from over time.

What’s the minimum credit score for a HELOC or home equity loan?

The minimum credit score for a HELOC or home equity loan will vary depending on the lender. You’ll typically need a credit score of at least 620 to qualify.

Do HELOCs have closing costs?

Yes, HELOCs typically come with closing costs that range from 3% – 6% of the total loan amount.

Can I pay off a HELOC early?

You can pay off your HELOC early if you have the funds available. However, you should first check to see if your lender charges a prepayment penalty.

The bottom line: Choose the right way to use home equity

As mortgage rates rise, homeowners can keep their current low-interest-rate home loans but still access the money tied up in their home.

A home equity loan gives you an upfront lump sum that you repay in fixed payments with a fixed interest rate. A HELOC lets you tap into equity as needed up to a certain limit. HELOCs typically have a variable interest rate.

While we do not currently offer HELOCs, you can apply for a Rocket Mortgage Home Equity Loan today.

¹Home Equity Loan Product is a second standalone lien and may not be used for piggyback transactions. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Not available on Ameriprise products. Additional restrictions, terms, and conditions apply. This is not a commitment to lend.

²Clients will not be charged the origination fee (processing fee for New Jersey) on newly originated Home Equity Loans when the rate is locked on or after August 25, 2026. Offer is only valid on retail loans. This offer cannot be retroactively applied to previously closed loans or locked loans. Additional restrictions/conditions apply. Rocket Mortgage may cancel or modify this offer at any time. This is not a commitment to lend.

³Refinancing may increase finance charges over the life of the loan.