Fixed home equity loan or HELOC?

A home equity loan and a home equity line of credit (HELOC) both borrow against the equity in your home, usually as a second lien behind your mortgage. They answer different needs. One is a lump sum with a fixed payment; the other is a line of credit you draw from as you go, at a rate that moves.

A lump sum or a line you draw

A home equity loan pays out the whole amount at closing. You start paying interest on all of it the next month, and repay it in equal payments over a set term, usually at a fixed rate. You know every payment on the day you sign.

A HELOC sets a limit you can draw against during a draw period, often 10 years, and then a repayment period in which you can no longer draw and pay back what you owe. You pay interest only on what you have actually drawn.

That last point matters most when you will spend the money over time, as with a renovation paid in stages. Take $60,000 at 8%, needed $5,000 a month over a year. Drawn from a HELOC as you go, the first year's interest is $2,600; borrowed all at once, it is $4,800, because the whole amount carries interest from the first month. A home equity loan works like the all-at-once case, however slowly you spend it.

Fixed against variable

The fixed loan's rate is set at closing and does not move. A HELOC's rate usually does. The CFPB's HELOC booklet warns: "If your plan has a variable interest rate, your monthly payments may change even if you don't draw more money."

Most HELOCs are priced at the prime rate plus a margin, and prime follows the Federal Reserve by convention, not by rule. In the Fed's words: "Although the Federal Reserve has no direct role in setting the prime rate, many banks choose to set their prime rates based partly on the target level of the federal funds rate". When the Fed moves its target, prime and a HELOC priced on it usually move with it. The fixed loan's rate, set in longer-term markets, does not track the Fed one for one either before you lock it; as the St. Louis Fed puts it, "when the Fed changes their monetary policy stance you don't usually see immediate movement in mortgage interest rates."

Every dwelling-secured loan whose rate can rise must state "the maximum interest rate that may be imposed", so a HELOC has a lifetime cap. Ask what it is. The home equity loan or HELOC calculator finds the break-even Fed move: how far rates would have to rise, and stay, for the fixed loan to cost less. In its example, $60,000 drawn over a year and paid down over 15 years, an 8% HELOC beats an 8.25% fixed loan with $1,500 of closing costs by about $3,700 over seven years, and rates would need to rise about one point and stay there to reverse that.

Interest-only draws and the payment step

Many HELOCs let you pay only the interest while you draw. The booklet: "Other plans may allow payment of the interest only, during the draw period, which means that you pay nothing toward the principal." That keeps early payments low, but the balance does not fall, and when the draw period ends the payment jumps to cover principal as well. A home equity loan's payment includes principal from the start, so there is no step. To compare the two fairly, set the HELOC to pay down over the same term as the loan; the calculator lets you.

Fees and closing costs

A home equity loan usually has closing costs like a small mortgage. HELOC costs vary: "Some lenders waive some or all of the up-front costs for a HELOC. Others may charge fees." A HELOC can also carry ongoing charges, so check "if annual maintenance fees or other fees apply, even if you are not actively using the credit line." The calculator counts each option's up-front costs once, in the cost over your horizon.

Paying it off early

Federal rules limit prepayment penalties on a home equity loan. Regulation Z says a covered loan "must not include a prepayment penalty unless" it meets several conditions, including a rate that cannot rise, and even then the penalty is capped at "2 percent, if incurred during the first two years following consummation" and "1 percent, if incurred during the third year following consummation", and none after that. Those rules do not cover HELOCs: the section excludes "A home equity line of credit subject to § 1026.40". The CFPB's HELOC worksheet has lines for an "Early termination fee" and "Prepayment and other penalty fees", so ask about both before you sign.

Lines can be frozen or reduced

A HELOC's limit is not guaranteed for its whole life. "HELOCs generally permit the lender to freeze or reduce your credit line if the value of your home falls or if they see a change for the worse in your financial situation." Regulation Z sets out when a lender may "prohibit additional extensions of credit or reduce the credit limit", including when the home's value "declines significantly below the dwelling's appraised value for purposes of the plan". A home equity loan has no such risk once it closes, because the money has already been paid out. If you are counting on drawing later, that difference matters.

Tax treatment

The interest on either can be deductible, but only under two conditions. IRS Publication 936 says you "can't deduct home mortgage interest unless" you "itemize deductions on Schedule A", and that interest on home equity loans and lines is "deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer's home that secures the loan." Money used for anything else, such as paying off cards or a car, earns no deduction under either. Most households take the standard deduction, so for many the question does not arise.

Which fits

A home equity loan tends to fit a single, known cost paid up front, a budget that needs a payment that never changes, or a view that rates will rise. A HELOC tends to fit costs spread over time or not yet known, money you may not end up needing, and a balance you plan to clear within a few years. If you are still deciding how much you could borrow, the HELOC limit calculator shows the line your equity supports; if you are weighing a refinance instead, see the HELOC or cash-out calculator.

Sources: Consumer Financial Protection Bureau, What you should know about Home Equity Lines of Credit (2022). Federal Reserve, What is the prime rate, and does the Federal Reserve set the prime rate? Federal Reserve Bank of St. Louis, What Determines Mortgage Rates? (October 2026). 12 CFR 1026.30, 1026.40 and 1026.43 (Regulation Z). IRS Publication 936 (2025). Interest figures computed with this site's own code.