What is a HELOC?

A Home Equity Line of Credit (HELOC) is a revolving line of credit secured by your home equity. Think of it like a credit card backed by your house,you can borrow, repay, and borrow again during the draw period.

How HELOCs Work

• Draw Period (typically 10 years): You can withdraw funds as needed up to your credit limit. Most HELOCs require interest-only payments during this phase.
• Repayment Period (typically 20 years): After the draw period ends, you can no longer borrow. Your payment increases to cover both principal and interest.
• Variable Rate: Most HELOCs have variable rates tied to the Prime Rate, meaning your payment can change if rates rise or fall.

HELOC Pros

• ✅ Flexibility: Only borrow what you need, when you need it
• ✅ Lower initial payments: Interest-only during draw period
• ✅ Reusable credit: Pay down balance and borrow again during draw period
• ✅ Only pay interest on what you use: Not the full approved amount
• ✅ Great for phased projects: Kitchen this year, bathroom next year

HELOC Cons

• ❌ Variable rates: Your payment can increase if rates rise
• ❌ Payment shock risk: Payment can double when repayment period begins
• ❌ Temptation to overborrow: Easy access can lead to overspending
• ❌ Complex structure: Harder to budget for than fixed loan

What is a Home Equity Loan?

A Home Equity Loan (sometimes called a "second mortgage") gives you a lump sum upfront with a fixed interest rate and fixed monthly payment for the entire loan term.

How Home Equity Loans Work

• Lump Sum: You receive the full loan amount at closing
• Fixed Rate: Your interest rate never changes
• Fixed Payment: Same monthly payment for 5-30 years
• Predictable Costs: Know exactly what you'll pay every month

Home Equity Loan Pros

• ✅ Fixed rate: Your rate never changes regardless of market conditions
• ✅ Predictable payment: Same amount every month for the entire term
• ✅ Simple budgeting: Easy to plan around a fixed monthly cost
• ✅ No payment shock: No sudden increase after draw period
• ✅ Often lower rates than HELOCs: Fixed rates can be 0.25-0.50% lower

Home Equity Loan Cons

• ❌ No flexibility: Must take full amount upfront
• ❌ Pay interest on full amount: Even if you don't need it all immediately
• ❌ Can't reborrow: Once you pay down principal, you can't access it again
• ❌ May pay more if rates drop: Stuck with higher rate unless you refinance

When to Choose a HELOC

A HELOC is best when you:

• Have ongoing or phased expenses: Multi-year renovation projects, buying and flipping multiple properties
• Don't know exact costs: Home renovation where surprises are common
• Want an emergency fund: Peace of mind having available credit for unexpected expenses
• Are doing BRRRR investing: Need flexible access to capital for multiple deals
• Expect rates to fall: Variable rate will decrease if Fed cuts rates
• Want lower initial payments: Interest-only period provides cash flow relief

Real-World HELOC Example

Scenario: Sarah is renovating her home over 3 years. She has $100k in equity.

• Year 1: Borrows $40k for kitchen ($283/month interest-only at 8.5%)
• Year 2: Borrows $30k for bathrooms ($496/month total)
• Year 3: Borrows $20k for basement ($638/month total)

Benefit: Sarah only pays interest on what she's borrowed each year, not the full $100k. Her payments grow gradually as she takes draws.

When to Choose a Home Equity Loan

A home equity loan is best when you:

• Know the exact amount needed: Car purchase, debt consolidation, down payment on rental property
• Want payment certainty: Fixed budget, fixed income (retirees), or risk-averse
• Consolidating high-interest debt: Paying off credit cards at 24% APR
• Making a one-time purchase: New roof, HVAC replacement, pool installation
• Expect rates to rise: Locking in a fixed rate protects you from future increases
• Don't want temptation of revolving credit: Prevents overspending

Real-World Home Equity Loan Example

Scenario: Mike has $30k in credit card debt at 22% APR and $8k in car loans at 7% APR.

• Current payments: $1,100/month total
• Home equity loan: $38k at 8.75% for 10 years = $478/month
• Savings: $622/month, $74,640 total over 10 years

Benefit: Mike consolidates high-interest debt into a single fixed payment, saves thousands, and knows exactly what he'll pay every month.

Rate Comparison: HELOC vs Home Equity Loan

As of November 2025, here's what you can expect:

HELOC Rates

• Excellent credit (740+): Prime + 0.50% to Prime + 1.50% = 8.00-9.00% APR
• Good credit (700-739): Prime + 1.50% to Prime + 2.50% = 9.00-10.00% APR
• Fair credit (660-699): Prime + 2.50% to Prime + 4.00% = 10.00-11.50% APR

Home Equity Loan Rates

• Excellent credit (740+): 8.25-9.00% APR fixed
• Good credit (700-739): 9.00-10.00% APR fixed
• Fair credit (660-699): 10.00-11.75% APR fixed

Note: Home equity loan rates are typically 0.25-0.50% higher than HELOC rates to compensate for the fixed-rate guarantee, but this gap narrows in volatile rate environments.

CLTV Limits: How Much Can You Borrow?

Both HELOCs and home equity loans use Combined Loan-to-Value (CLTV) ratios to determine your borrowing limit:

• Primary residence: Up to 80-85% CLTV
• Condos: 75-80% CLTV
• Investment properties: 70-75% CLTV
• High credit scores (760+): May qualify for 90% CLTV at some lenders

CLTV Calculation Example

Home value: $500,000
First mortgage balance: $300,000
Max CLTV: 80%
Calculation: ($500,000 × 0.80) - $300,000 = $100,000 available credit

Tax Deductibility

Both HELOCs and home equity loans may offer tax-deductible interest under the Tax Cuts and Jobs Act (TCJA), but only if you use the funds to buy, build, or substantially improve the home that secures the loan.

Tax-Deductible Uses

• ✅ Kitchen or bathroom renovation
• ✅ Adding a room or ADU
• ✅ New roof, HVAC, windows, siding
• ✅ Down payment on a second home (if HELOC is on that property)

NOT Tax-Deductible Uses

• ❌ Paying off credit cards
• ❌ Car purchase
• ❌ Vacation
• ❌ College tuition
• ❌ Investment property down payment (if HELOC is on primary residence)

Always consult a tax professional to understand your specific situation and current tax laws.

Closing Costs Comparison

HELOC Closing Costs

Many lenders offer no closing cost HELOCs if you keep the line open for 2-3 years. Typical costs if charged:

• Appraisal: $400-$700
• Title search: $200-$400
• Credit report: $30-$50
• Recording fees: $50-$250
• Total: $680-$1,400 (often waived)

Home Equity Loan Closing Costs

Usually 2-5% of loan amount:

• Appraisal: $400-$700
• Origination fee: 1-2% of loan
• Title insurance: $500-$1,500
• Recording fees: $50-$250
• Total on $50k loan: $1,450-$3,950

Tip: Some lenders offer no-closing-cost home equity loans but charge a slightly higher rate (0.25-0.50% more).

The Hybrid Option: Fixed-Rate HELOC

Some lenders now offer fixed-rate HELOC options where you can convert all or part of your variable-rate balance to a fixed rate. This gives you:

• ✅ Flexibility of a HELOC during draw period
• ✅ Rate protection when you convert to fixed
• ✅ Predictable payments on fixed portion
• ✅ Ability to keep some balance variable for future draws

Example: You have a $100k HELOC. You borrow $60k for a kitchen renovation and convert it to a 10-year fixed rate at 8.5%. You keep $40k available at variable rate for future projects.

Bottom Line: Which One Should You Choose?

Can't decide? Use our HELOC Calculator to model different scenarios and see which option saves you more money based on your specific situation.

Calculate Your Options

Ready to see the numbers for your situation? Try our calculators:

• HELOC Calculator - Model draw period payments, repayment period costs, and available credit
• Mortgage Calculator - Compare total costs including your first mortgage