HELOC vs home equity loan: how each works, costs and risks (2026)
Edited by Moe Ameen · Published
A home equity loan pays you a lump sum, usually at a fixed rate, and you repay it in equal installments. A HELOC is a credit line you draw on as needed, usually at a variable rate, with a draw period that might last 10 years and a repayment period after it. Both use your home as collateral, so falling behind can cost you the house. The interest is tax deductible only if you spend the money on the home.
Key takeaways
- Home equity loan: one lump sum, usually a fixed rate. HELOC: borrow as you go, usually a variable rate.
- Bankrate and NerdWallet put the usual cap at 80% to 85% of your home's value, counting your mortgage.
- Both can carry closing costs, which Bankrate and NerdWallet put at 2% to 5% of the amount.
- Federal law gives you until midnight of the third business day to cancel either one on your main home.
- The IRS lets you deduct the interest only if the money buys, builds or substantially improves the home.
What is the difference between a HELOC and a home equity loan?
A home equity loan pays out once and is repaid in equal payments. A HELOC is a line you borrow from, repay and borrow from again until the draw period ends.
| HELOC | Home equity loan | |
|---|---|---|
| How you get the money | Draw as needed, up to your limit, during the draw period [1] | One lump sum [2] |
| Rate | Usually variable, so payments can change month to month [1] | Usually fixed [2] |
| Payments | Often a minimum based on your balance [1] | Equal payments that pay off the whole loan [3] |
| Need more later? | Borrow again while the line is open [3] | Apply for a new loan [3] |
| Home at risk if you can't pay? | Yes [1] | Yes [2] |
Some HELOCs let you lock part of the balance at a fixed rate. The CFPB says that rate is usually higher than the variable one, but the payments are easier to predict [3].
How do HELOC draw and repayment periods work?
You borrow during the draw period, which the CFPB says could last 10 years. Then you repay, often over 10 or 20 years, and payments usually go up.
NerdWallet says HELOCs often have a 10-year draw period when you only have to pay interest, followed by up to 20 years to repay [9]. The CFPB warns that some plans make the whole balance due as soon as repayment begins [1]. Its booklet calls that a balloon payment. If you can't pay it or refinance it, you could lose your home [3].
Some plans require a minimum draw each time, such as $300, or ask you to take an amount when the line opens [3]. If you sell the house, you generally have to pay the HELOC off in full [3].
How much can you borrow against your home?
It depends on the lender. Bankrate and NerdWallet say most cap all debt on the home at 80% to 85% of its value, and a few go higher.
That cap is the combined loan-to-value ratio, or CLTV: your mortgage balance plus the new loan or line, divided by the home's appraised value. NerdWallet says most HELOC lenders cap it at 85% [9]. Bankrate says lenders typically let you tap 80% or 85% of the home's value, sometimes more, minus what you owe on the mortgage [7][8]. Neither figure is a federal rule; each lender sets its own.
Lenders also look at your credit and income. To see your debt load the way a lender adds it up, use the debt-to-income ratio calculator.
What do HELOCs and home equity loans cost to open?
Closing costs, which Bankrate and NerdWallet put at 2% to 5% of the amount. HELOCs can add annual, inactivity or early-closure fees.
The CFPB lists what you might pay for a HELOC: an appraisal, an application fee that may not be refunded if you're turned down, and closing costs such as attorney fees, title search, mortgage preparation and filing, property and title insurance, and taxes [3]. Its comparison worksheet also has lines for points, annual fees, transaction fees, inactivity fees and early termination fees [3].
Bankrate puts home equity loan closing costs at 2% to 5% of the amount borrowed, with some lenders waiving them [8]. NerdWallet gives the same range for HELOCs and says no-closing-cost lines may require you to keep the account open for a set time [9]. The CFPB also says a lender generally can't charge a nonrefundable fee until three days after you get the HELOC disclosures [3].
Can you cancel a HELOC or home equity loan after closing?
Yes, on your main home. Regulation Z lets you cancel until midnight of the third business day, and the lender must return the fees you paid.
For a home equity loan, the right covers credit secured by your principal dwelling. You have until midnight of the third business day after the latest of three things: closing, getting the rescission notice, or getting all the material disclosures [5]. For a HELOC, the same clock applies when the plan opens, and again when the credit limit goes up [4].
If the lender never delivers the notice or disclosures, the right can last up to three years [4][5]. It doesn't apply to a loan used to buy or build the home [4][5]. The CFPB says to cancel in writing, and that the lender must return the fees you paid, including application and appraisal fees [3].
Is HELOC or home equity loan interest tax deductible?
Only if you use the money to buy, build or substantially improve the home that secures the loan, and only if you itemize.
IRS Publication 936 for 2025 returns says that however long ago you borrowed, you can't deduct interest on a loan secured by your home to the extent the money wasn't used to buy, build or substantially improve that home [6]. You also have to itemize on Schedule A [6]. The loan also counts toward the overall cap on deductible mortgage debt, $750,000 ($375,000 married filing separately) for debt taken on after December 15, 2017 [6].
The IRS counts an improvement as substantial if it adds value, extends the home's useful life or adapts it to new uses. Ordinary repairs like repainting don't count on their own [6]. Paying off cards or a car with home equity money doesn't make that interest deductible. Check with a tax professional for your own return.
Glisten check
How much room a home really has, and which product fits
| Lender's CLTV cap | All debt allowed on the home | Room left for a HELOC or loan |
|---|---|---|
| 80% | $320,000 | $70,000 |
| 85% | $340,000 | $90,000 |
| If you… | Usually fits | Why |
|---|---|---|
| Know the full cost now, like a roof | Home equity loan | One payout, usually a fixed rate and equal payments |
| Will pay over months or years, like tuition or a phased remodel | HELOC | Draw only what you need and pay interest on that |
| Need payments that won't change | Home equity loan | A HELOC's variable rate can move your payment |
| Might sell in a year or two | Neither, often | Closing costs of 2% to 5% eat into a short loan, and a HELOC must be paid off at sale [3][8] |
Is this right for you?
Best for
- Homeowners with equity choosing between a lump sum and a line of credit.
- Anyone planning a renovation who wants to know whether the interest is deductible.
Not ideal for
- Paying off unsecured debt you're already behind on. You'd be swapping card debt for debt that can cost you the house.
- Comparing specific lenders or today's rates. We don't list lenders; get written estimates from at least three, as the CFPB suggests.
Frequently asked questions
Is a HELOC or a home equity loan better?
Neither is better across the board. A home equity loan suits one known cost and steady payments. A HELOC suits costs that come over time, as long as you can handle a payment that moves with the rate [1][2].
Can I lose my house with a HELOC?
Yes. Both HELOCs and home equity loans use your home as collateral, and the CFPB says you could lose it if you can't repay [1][2].
How long is a HELOC draw period?
It varies by plan. The CFPB gives 10 years as an example, with repayment often over 10 or 20 years after that [1].
Can my lender freeze my HELOC?
Generally yes, if your home's value drops or your finances get worse. The CFPB suggests asking why and checking your credit reports for errors [3].
How we know this
On November 2, 2026 we read the CFPB's Ask CFPB pages on HELOCs and home equity loans, its HELOC booklet, Regulation Z sections 1026.15 and 1026.23 on consumerfinance.gov, and IRS Publication 936 for 2025 returns. Borrowing caps and closing cost ranges are lender practice, so we took them from Bankrate and NerdWallet and say so. The worked example is our own arithmetic. This is general information, not tax or legal advice, and Glisten doesn't make loans.
- What is a home equity line of credit (HELOC)?, CFPB. Checked November 2, 2026.
- What is a home equity loan?, CFPB. Checked November 2, 2026.
- What you should know about home equity lines of credit, CFPB. Checked November 2, 2026.
- Regulation Z § 1026.15: Right of rescission (open-end credit), CFPB. Checked November 2, 2026.
- Regulation Z § 1026.23: Right of rescission (closed-end credit), CFPB. Checked November 2, 2026.
- Publication 936 (2025), Home Mortgage Interest Deduction, IRS. Checked November 2, 2026.
- HELOC vs. home equity loan: What's the difference?, Bankrate. Checked November 2, 2026.
- Home equity loan pros and cons, Bankrate. Checked November 2, 2026.
- What is a HELOC, or home equity line of credit?, NerdWallet. Checked November 2, 2026.