A homeowner with $200,000 in equity takes out a $100,000 home equity loan at 8.5% fixed. Interest starts accruing on the full $100,000 immediately, costing $708/month in principal and interest on a 20-year term. That same homeowner could open a $100,000 HELOC, draw $30,000 for a kitchen remodel, and pay interest only on the $30,000 until they need more. At 8.75% variable, the interest-only payment on $30,000 is $219/month. The remaining $70,000 sits available at zero cost until drawn.
If you know exactly how much you need and you need it all at once, a home equity loan locks in a fixed rate and a fixed payment. If there's any chance you'll use less than the full amount or need the money in stages, the HELOC saves you interest on every dollar you don't touch.
How They Actually Work
Both products let you borrow against your home's equity. Most lenders allow a combined loan-to-value (CLTV) of 80-90%, meaning your first mortgage balance plus the new borrowing can't exceed 80-90% of your home's value. On a home worth $600,000 with a $350,000 mortgage, you could access $130,000-$190,000 depending on the lender's CLTV cap.
A home equity loan delivers the full amount at closing. You get a fixed rate, fixed term (typically 5-20 years), and fixed monthly payment. Closing costs run 2-5% of the loan amount. It works like a second mortgage with a predictable payoff schedule.
A HELOC works like a credit card secured by your home. The lender approves a credit limit, and you draw against it as needed during a 10-year draw period. During that time, most HELOCs require interest-only payments on whatever you've borrowed. After the draw period ends, you enter a 10-20 year repayment period where you pay principal and interest on the remaining balance. Closing costs are typically minimal, often under $500.
The rate structure is the fundamental difference. Home equity loans are fixed. HELOCs are variable, usually tied to the prime rate plus a margin. When the Fed cuts rates, HELOC payments drop. When rates rise, payments increase. Some lenders now offer fixed-rate HELOC options that let you lock portions of your balance at a fixed rate while keeping the rest variable.