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HELOC vs. Home Equity Loan—What is the Difference?

What you'll learn: Lines of credit vs. loan: How you receive the cash, interest rate, and repayment

EXPECTED READ TIME: 7 MINUTES

December 1, 2020 | Updated November 8, 2023

Do you need cash to tackle home improvements, pay down debt, or fund other expenses? Home equity loans and lines of credit are two popular ways to access equity for a variety of needs. In this article, we will cover how they differ, their pros and cons, and other factors to consider so you can choose the best option for you.

Home equity loan defined

A home equity loan is a loan for a fixed amount of money that you access all at once, usually with a fixed interest rate. You secure this loan type through the equity in your home.

HELOC defined

A home equity line of credit (HELOC) is a revolving line of credit based on the equity you have in your home. Similar to a credit card, your lender sets a limit and you can access the funds if and when you need them during the draw period.

How are home equity loans and HELOCs similar?

If you have built up enough equity in your home and have favorable credit, you can likely leverage either of these loan options. It is easy to confuse these loan types because they have some similarities:

You must meet certain equity and credit standards. Your lender will calculate your loan-to-value ratio and run a credit check before approving the loan.
Your home is used as collateral. Both HELOCs and home equity loans are considered second mortgages. If you can not keep up with payments, there is risk of foreclosure on your property.
Rates may be lower than other loan types. When your home is secured as collateral, interest rates are often lower than unsecured loans such as personal loans or credit cards.
There are no rules about what HELOC and home equity loan funds can be used for. Although it is recommended to use your equity to add value to your home or improve your finances, there are no limitations in place for how to use the cash.

HELOC vs. home equity loan: What are the differences?

HELOCs and home equity loans have many important differences that make them well suited for certain situations and less appealing for others. Here are three key differences:

1. How you receive your funds

Does it matter when and how you will get your cash? Consider if you need it all right away or prefer more flexibility.

Home Equity Loan: With a home equity loan, you will receive a lump sum of funds at loan closing. This can be more useful if you have a specific, big project to tackle and you need the funds all at once.
HELOC: You can access funds when you need them over a set period of time, typically 10 years. Depending on your lender’s offerings, you may be able to use HELOC funds by paying with checks, a card, or account transfer.

2. The type of interest rate

Do you appreciate knowing in advance what your payments will be, or are you comfortable with fluctuations? A fixed or variable rate will determine exactly what your payments look like.

Home Equity Loan: Typically, you have a fixed interest rate over the life of the loan. That means, you will know your monthly payment and the total cost of the loan up front.
HELOC: The rate will be variable, meaning it can go up or down depending on the market. Despite the uncertainty, a HELOC’s interest rate is often lower than other loan types.

3. How you will repay your loan

What is more important, consistency or flexibility?

Home Equity Loan: Like a regular mortgage, home equity loans need to be repaid over a set period of time with a defined payment schedule.
HELOC: Once you start to access your available HELOC funds, you only need to pay the minimum payment every month until after the draw period is complete. Then, you may be required to pay the balance all at once or you may be allowed to repay it over a specified time period.

Home equity loans vs. lines of credit

Here is a recap of some of the most important similarities and differences:

	Home Equity Loan	HELOC
Access to cash at closing:	Yes—lump sum	Yes—line of credit
Home used as collateral:	Yes	Yes
Interest rate:	Fixed (Though some lenders may offer variable options.)	Variable
Repayment schedule:	Defined payments	Variable payments
Funds can be used for:	Anything	Anything

Pros and cons

As you have learned, there are pros and cons to each loan type. The following are the potential advantages and disadvantages of home equity loans vs. HELOCs:

Home Equity Loan Advantages	Home Equity Loan Disadvantages
Get an up-front lump sum of cash at closing	Often has a higher interest rate than cash-outs and HELOCs
Fixed-interest rate and monthly payments (Some lenders may offer variable-rate options)	Pay interest on the whole amount whether or not you use it all
Does not impact your first mortgage if you want to keep those terms	Adds a second mortgage to manage
Shorter terms can mean less interest paid	Shorter terms can mean higher monthly payments

HELOC Advantages	HELOC Disadvantages
Take only as much as you need, as you need it, during the draw period	Variable interest rate may increase with the market
Only pay interest on the amount you draw	Fluctuating monthly payments can make it hard to budget
Low introductory interest rate	Revolving line of credit can be tempting to use for unintended purposes
Acts like a credit card, but often with a higher balance and lower interest rate	Adds a second mortgage to manage

Which is better: A home equity loan or a HELOC?

You have seen the differences. You know the pros and cons. So how do you know which is better? Here are two examples to illustrate just how you could make the choice.

Scenario 1: Hiring a contractor

Say you want to put an addition on your home or upgrade your kitchen. If you have a contractor who will be managing the job, you know what the costs will be and how quickly you will need the funds. Therefore, a home equity loan might be the better choice, because you will have a fixed payment every month, and you’ll have access to all the needed funds up front.

Scenario 2: DIY home improvements

Now, imagine you want to upgrade your home over time. Perhaps you are a do-it-yourself type of person or would rather upgrade part of the home this year, see how things go, and maybe make a few more upgrades down the road. With this example, a HELOC is likely the better choice because you do not need the funds all at once and may change your mind on upgrades in the future.

If you are…	Then you may choose…
Working with a contractor and know the total costs at the beginning of the project:	Home Equity Loan
Making home improvements a little at a time and do not know the full costs up-front:	HELOC
Planning to make a large, one-time payment for an investment property, wedding expenses, or to consolidate debt:	Home Equity Loan
Attending college and will make intermittent payments for tuition, housing, and meal plans over the next few years:	HELOC

Home equity loan vs. line of credit: What is best for you?

We know you want to make the right choice when borrowing against your home. The following questions can help you make a decision:

How and when do you want to receive the funds?
Do you want a fixed or variable rate?
What type of repayment schedule do you prefer?

If you need help deciding, or are ready to move forward, a mortgage loan officer can help you through the HELOC or home equity loan process steps.

For more information about PenFed Mortgages:

PenFed Mortgage:

866-726-1655

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Disclosures

^*Prime Rate is 6.750% as of December 12, 2025. The APR for this Home Equity Line of Credit (HELOC) is based on prime plus a margin and can change monthly. Fixed Rate Advances will be amortized over the Fixed Rate Advance Term, with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin, and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than 6.750% for primary residences and second homes.

Annual Fee: Notwithstanding the foregoing, an annual fee of $99 will be assessed on each account anniversary.
Home equity lines of credit (HELOC) are variable rate loans and the interest rate is subject to increase after consummation of the loan on monthly basis. Closing costs range between $500 and $8,500 for credit lines of $500,000. Contact a representative for additional details.

Appraisals: PenFed will attempt to establish value via an independent method. If that method is unsuccessful, or the value is not sufficient for the amount requested, an appraisal will be required regardless of CLTV. An appraisal is always required in the following circumstances:

For all loans with a loan amount greater than $400,000.

If an appraisal is required, it must be ordered by PenFed. You will be contacted for authorization and payment prior to ordering. Appraisal fees average $550 to $850 (some run higher).

Closing Cost Credit: PenFed will pay most closing costs associated with a home equity line of credit (HELOC), which includes credit report, flood certification, settlement/closing, property ownership and encumbrances search, recording, property search, and quick close. Member is responsible for any city, county, and/or state taxes if the subject property is located in FL, LA, MD, MN, NY, TN, or VA. If an appraisal is required, the member, who is responsible for the fee whether or not the loan closes, will pay the cost.

Interest may be tax deductible, consult a tax advisor for further information regarding the tax deductibility of interest and charges.

Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Draw Period. During your Draw Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.

Fixed Rate Advances will be amortized over the Fixed Rate Advance Term with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than 6.750% for primary residences and second homes.

Property Insurance: Property insurance is required.

Multiple PenFed Loans: Multiple PenFed Equity loans and HELOCs are available as long as the member and collateral qualify (except Texas). For Equity loans and HELOCs the total indebtedness cannot exceed $500,000 for all PenFed Equity and HELOCs combined.

PenFed does not lend on:

Mobile homes
Co-ops or time-shares
Properties that are currently listed on the market for sale
Commercial property or property used for commercial purposes, even if a residence is part of the property
Undeveloped property (land only)
Properties with more than 4 units

Properties that are currently under major construction/renovations: Property must be fully livable, with no safety issues. (Examples: no missing rails from stairs/decks, no open walls with wires showing, missing kitchen appliances/counters, missing bath fixtures or unfinished pool).

Additional limitations may apply

Home Equity Line of Credit:

This Account has a Draw Period of 10 years, followed by a repayment period of 20 years.
If only minimum payments are made during the draw period, the loan balance will not decrease.
In Texas, the maximum CLTV available is 80% on owner occupied properties. Additional restrictions apply in Texas, so please ask a representative for details.
In all other states, the maximum CLTV is 85% on owner occupied properties and second homes. Additional restrictions or requirements may apply based on application characteristics.
Property type of Condo has a maximum CLTV of 80%.
The maximum CLTV available is dependent on credit qualification.
Rates vary depending on owner occupancy and CLTV and other loan criteria.

Minimum Loan Amount Requirements in all States:

For an owner occupied property or second home the minimum loan amount is $25,000 and the maximum amount is $500,000 with a CLTV of 85% or less of the fair market value.

Other terms and conditions apply; call 844-918-4307 to speak with a representative for details. All rates and offers are subject to change without notice. To receive advertised product, you must become a member of PenFed.