When my wife and I wanted to renovate our kitchen, we had a choice: home equity loan or HELOC. Same source of money (our house), two completely different products. I spent a weekend researching the difference and was surprised by how many people -- including a few friends who'd already tapped their equity -- didn't fully understand what they'd signed up for. So let me break it down the way I wish someone had explained it to me.
A home equity loan gives you a lump sum at a fixed interest rate. You borrow $50,000, you get $50,000, and you pay it back in equal monthly installments over 5-30 years. It's essentially a second mortgage. Rates are currently running 7-10% for most borrowers. The fixed rate means your payment never changes -- you know exactly what you owe every month for the entire loan term. For a defined project with a clear budget (like our kitchen reno at $45,000), this predictability is really nice.
A HELOC (Home Equity Line of Credit) works more like a credit card secured by your house. You get approved for a credit limit -- say $80,000 -- and you can draw from it as needed during a 'draw period' that typically lasts 10 years. During the draw period, you usually make interest-only payments on whatever you've borrowed. After that, you enter the 'repayment period' (10-20 years) where you pay back principal plus interest. The rate is almost always variable, which means your payment can change.
Here's where the HELOC gets tricky -- and where I've seen people get in trouble. During the draw period, you're making interest-only payments on a variable rate. That feels cheap. Maybe you're paying $250/month on a $60,000 balance. Then the repayment period kicks in, your payment jumps to $800/month, and rates have gone up 2% since you opened it. Suddenly that affordable 'line of credit' is a very real financial burden. I've spoken with homeowners who were genuinely shocked when their HELOC payments doubled or tripled at the end of the draw period.
So when does each one make sense? Home equity loan: you have a specific amount you need, you want predictable payments, and you want the security of a fixed rate. Kitchen remodel for $40,000? Pool for $55,000? Debt consolidation for a known amount? Home equity loan. HELOC: you need flexible access to funds over time, maybe for ongoing home improvements where you're not sure of the total cost, or as an emergency backstop. Some people use HELOCs to fund rental property down payments and then pay it back from rental income.
Both products use your house as collateral. I need to say that plainly because some people gloss over it. If you can't make the payments on your home equity loan or HELOC, the lender can foreclose on your home. This isn't like defaulting on a credit card. The stakes are fundamentally different. Borrow responsibly and only for things that genuinely improve your financial position -- home improvements that add value, consolidating high-interest debt, education expenses with a clear ROI.
Interest on home equity products may be tax-deductible if you use the funds for home improvements. Under current tax law, you can deduct interest on up to $750,000 of combined mortgage debt (including home equity) if the borrowed funds are used to 'buy, build, or substantially improve' the home securing the loan. Using home equity funds to pay for a vacation or buy a car? Not deductible. Using it to add a bathroom or replace the roof? Likely deductible. Talk to a tax professional about your specific situation.
We ultimately went with a home equity loan at 7.8% for our kitchen project. The fixed payment fit our budget, we knew exactly how much we were borrowing, and we didn't want the uncertainty of a variable rate. Three years in, I'm glad we chose it. The kitchen turned out great, we can comfortably afford the payment, and our home's value increased by more than the renovation cost. Sometimes the boring, predictable option is the right one.
