HELOC vs. Home Equity Loan: Which is Right for You?

Key differences between a home equity loan and a (HELOC)

As you examine the comparison of a home equity loan vs. HELOC, you will notice some important differences between the two products.

Fixed interest rates vs. Variable interest rates

Typically, a home equity loan charges interest at a fixed rate, while most HELOCs charge interest at a variable rate.

Fixed interest rates provide you with predictable repayments. This makes it possible to schedule consistent monthly repayment amounts over the life of the loan.

Variable interest rates are based on the interest rate on a standard index like the lending institution’s prime rate or U.S. Treasury bill rate plus a margin set by the lender. This means they can fluctuate as the index changes based on factors in the U.S. economy.

Lump sum disbursement vs. Withdrawals as needed

Another difference between a HELOC and a home equity loan is how you receive the money.

• A home equity loan is disbursed as a lump sum. The entire loan amount will be deposited into your preferred account(s) when you receive your funds.
• A home equity line of credit is typically set up as a separate account from which you can withdraw funds only as you need them.
• Additionally, a HELOC lender should assign a withdrawal window typically referred to as a draw period. You will only be able to withdraw funds during that time. 
• Example: If you were to be approved for a home equity loan worth $50,000, you would receive the whole amount at once. If you were to receive a HELOC with a draw limit of $50,000, you would be able to take out up to $50,000 over any number of transactions over the course of the draw period.

Fees and penalties

• Both home equity loans and HELOCs may assess a variety of closing costs and can include prepayment penalties if you pay back the loan before the scheduled term.
• Lenders are required to provide you with information about these fees and penalties up front so you can evaluate which terms will work best for you.
• HELOCs may also include additional annual fees over the life of the loan, and some may also charge each time you make a withdrawal. You’ll likely want to pay attention to these requirements before deciding to take out a loan.

READ MORE: Home equity loan closing costs & fees

Taking out a home equity loan or a HELOC in 2025

The economy plays a role in home equity loan and HELOC rates, too. Lenders typically charge rates on their loans based on the federal funds rate, so if the government raises the rate, the banks will raise theirs too.

If your HELOC is a revolving line of credit with variable interest, it may make you more vulnerable to Fed changes. For this reason, you might also find that your interest rate has suddenly gotten steeper or lower.  

Since most home equity loans have a fixed rate, the interest on your loan won’t change once you’ve borrowed it. That said, the interest rates could help you determine if now is the best time to borrow.  

HELOC and home equity loan rates have slightly declined in 2025, and experts predict this trend will continue for the year of 2025. Depending on how much you can pay in interest, you should decide for yourself whether now is the right time to take out a HELOC or a home equity loan.

Pros and Cons: Home equity loans vs. HELOCs

Home equity loan pros

• Typically fixed payments: Enjoy predictable monthly payments and interest rates that remain constant throughout the loan term.
• Lump sum: Receive a one-time lump sum of money making it ideal for large expenses.

Home equity loan cons

• Less flexibility: Once you receive the lump sum, you cannot borrow more unless you apply for another loan.
• Risk of overborrowing: The temptation to overborrow can be very real, and lead to potential financial strain down the road.

HELOC pros

• Flexibility: Access funds as needed up to a certain limit during the draw period.
• Interest only payments: Depending on the terms of the HELOC, you may only be required to pay interest during the draw period, which may lower initial monthly payments.

HELOC cons

• Typically variable interest rates: HELOC interest rates may fluctuate over the life of the loan.
• Risk of overspending: A HELOC’s flexibility may tempt you to overspend and accumulate more debt than you can comfortably repay. 

Home equity loan vs. HELOC: Which one is right for you?