What is the difference between a home equity loan and HELOC?

A home equity loan provides a lump sum with fixed rates and payments, while a HELOC works like a credit card with a credit line, variable rates, and flexible access to funds during a draw period.

Which has better rates: home equity loan or HELOC?

Home equity loans typically offer slightly lower fixed rates, while HELOCs have variable rates that can start lower but may increase over time. Current rates in 2025 average 7.5-9% for both options.

Should I choose a home equity loan or HELOC in 2025?

Choose a home equity loan for one-time expenses with predictable payments. Choose a HELOC for ongoing expenses, flexibility, or if you expect rates to fall. Consider your risk tolerance and spending pattern.

Home Equity Loan vs HELOC 2025: Which Is Better for You? Complete Comparison

Choosing between a home equity loan and HELOC in 2025 can save or cost you thousands. Both let you tap your home's equity, but they work very differently. Here's your complete comparison guide to make the right choice for your financial goals.

Quick Decision Guide

Choose Home Equity Loan If:

You need a lump sum for one project
You want predictable fixed payments
You prefer rate protection
You have good spending discipline

Choose HELOC If:

You need flexible access to funds
You have ongoing expenses
You expect rates to fall
You want lower initial costs

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Home Equity Loan vs HELOC: Key Differences

Feature	Home Equity Loan	HELOC
How You Receive Money	Lump sum at closing	Credit line, draw as needed
Interest Rate	Fixed rate	Variable rate
Payment Structure	Fixed monthly payments	Interest-only during draw period
Typical Term	5-30 years	10-year draw + 10-20 year repay
Closing Costs	2-5% of loan amount	Often $0-$500
Best For	One-time large expenses	Ongoing or uncertain expenses

What Is a Home Equity Loan?

A home equity loan is a second mortgage that provides a lump sum based on your home's equity. You receive all the money at closing and repay it with fixed monthly payments over a set term, typically 5-30 years.

Home Equity Loan Pros

Fixed interest rate: Your rate never changes, providing payment predictability
Fixed monthly payments: Easier to budget with consistent payment amounts
Lump sum access: Perfect for large one-time expenses like home renovations
Rate protection: Protected from rising interest rates
Tax benefits: Interest may be deductible for home improvements

Home Equity Loan Cons

Higher closing costs: Typically 2-5% of the loan amount
No flexibility: Can't access additional funds without refinancing
Immediate interest: Pay interest on the full amount from day one
Fixed rate risk: Can't benefit if rates drop significantly

What Is a HELOC?

A Home Equity Line of Credit (HELOC) works like a credit card secured by your home. You get a credit limit and can draw funds as needed during a "draw period" (typically 10 years), then repay during a "repayment period" (typically 10-20 years).

HELOC Pros

Flexibility: Access funds as needed, when needed
Lower initial costs: Often no or minimal closing costs
Interest-only payments: Lower payments during draw period
Pay interest only on what you use: Don't pay interest on unused credit
Potential rate benefits: Can benefit if rates fall

HELOC Cons

Variable interest rates: Payments can increase if rates rise
Payment shock: Payments jump significantly when repayment period begins
Temptation to overspend: Easy access can lead to debt accumulation
Rate uncertainty: Difficult to predict long-term costs
Annual fees: Some lenders charge ongoing fees

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Current Rates: Home Equity Loan vs HELOC 2025

As of August 2025, here's how rates compare:

Average Rates (August 2025)

Home Equity Loans: 7.5% - 9.5% (fixed)
HELOCs: 7.0% - 9.0% (variable, introductory rates)
Prime Rate: 8.50% (HELOC rates typically Prime + margin)

Frequently Asked Questions

Can I have both a home equity loan and HELOC?

Yes, but most lenders limit your total home equity borrowing to 80-85% of your home's value across all loans. Having both may also complicate your finances and increase risk.

Which option is better for debt consolidation?

A home equity loan is typically better for debt consolidation because you get a lump sum to pay off all debts immediately, with fixed payments that help prevent re-accumulating debt.

What happens if I sell my home?

Both loans must be paid in full when you sell your home. The proceeds from the sale pay off your primary mortgage first, then any home equity loans or HELOCs.