Owning a home comes with a major advantage: the ability to tap into your equity for financial needs. As you pay down the mortgage, and property values rise, you’re building home equity.
Homeowners can leverage this equity for major expenses like home renovations, debt consolidation, or unexpected costs.
Two of the most popular ways to access your equity are with a home equity loan or home equity line of credit (HELOC). Both options allow you to borrow against your home’s value, but they work in different ways.
In this guide, we’ll break down the differences and similarities between a home equity loan vs line of credit so you can determine which option is right for you.
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What is home equity?
First, let’s start with the basics of home equity: Your home equity is the difference between your home’s market value and the amount you still owe on your mortgage.
Essentially, it’s the portion of your home that you truly own.
There are two primary ways to build home equity:
Paying down your mortgage
Property value appreciating over time
Significant home price growth is the main reason why U.S. homeowners currently hold an average of $315,000 in equity.
Your home equity can be used as collateral for loans, making it a valuable financial tool.
What is a home equity loan?
A home equity loan is a type of first or second mortgage that allows homeowners to borrow a lump sum of money secured by the borrower’s property.
Home equity loans provide a fixed amount upfront that is repaid in equal monthly installments over a set term—typically anywhere from 5-30 years.
Home equity loan requirements
To qualify for a home equity loan, you must have sufficient equity in your home.
Lenders also will evaluate the following factors:
Credit score
Credit history
Employment
Income
Debt payments
Debt-to-income ratio (DTI)
Lenders typically allow borrowing up to 85% of the home’s value minus what you owe on your mortgage.
What is a home equity line of credit (HELOC)?
A HELOC operates as a revolving line of credit. Instead of receiving a one-time loan amount as you would with a traditional loan, a HELOC gives you a borrowing (or credit) limit.
As you repay the balance, you can withdraw money from the credit line when you need it, as you would with a credit card.
A HELOC through Figure gives you the entire approved amount upfront, with the predictability of a fixed interest rate1navigates to numbered disclaimer. Unlike traditional HELOCs, you can pay down both principal and interest over the full loan term, and as you repay, you have the flexibility to draw funds again from your available credit when needed.
HELOC requirements
HELOC requirements are similar to home equity loan requirements.
Lenders will make sure the borrower has sufficient equity, and evaluate their credit score, DTI, income, and employment history.
Key differences between HELOCs and home equity loans
When deciding between a HELOC or home equity loan, it’s important to understand how they differ in structure, repayment, and flexibility.
Let’s take a quick look at the key differences between home equity loans and a Figure HELOC.
Loan structure
Home equity loan: Lump sum of cash distributed at closing
Figure HELOC: Upfront lump sum that operates as a revolving line of credit once part of the principal is repaid
Disbursement
Home equity loan: Full amount received upfront
Figure HELOC: Full amount received upfront, and as you repay the balance, you can withdraw money from the credit line
Repayment
Home equity loan: Fixed monthly payments for the entire term
Figure HELOC: Fixed monthly payments1navigates to numbered disclaimer and the ability to draw additional funds during the draw period and repay principal and interest throughout the loan term
Interest rate
Home equity loan: Typically fixed, with predictable payments
Figure HELOC: Fixed interest rate1navigates to numbered disclaimer
Best for
Home equity loan: One-time expenses, like major repairs or large purchases
Figure HELOC: A range of ongoing or large expenses, like home renovations, tuition, or debt consolidation.
Traditional HELOCs are ideal for those who need flexible financing, while home equity loans are best-suited for homeowners who need a one-time lump sum with predictable payments.
Similarities between a HELOC vs home equity loan
HELOCs and home equity loans may function differently, but they share several similarities.
Both use your home as collateral
HELOCs and home equity loans both are secured by your home, which allows lenders to offer lower interest rates compared to unsecured loans like personal loans or credit cards.
However, this also means the lender can foreclose on your home if you fail to make payments.
Both depend on available home equity
Before approving either type of loan, the lender will evaluate the amount of equity in the home.
In general, borrowers need to retain at least 15-20% equity in their home after taking out a HELOC or home equity loan.
The total amount you can borrow depends on the home’s value and the outstanding mortgage balance, as well as your credit and DTI.
Both can be used for a variety of expenses
HELOCs and home equity loans can be used for a wide range of financial needs.
Common uses include:
Debt consolidation
Home improvements and renovations
Education costs
Medical expenses
Major life events
Investment opportunities
Because they have more favorable interest rates than other types of loans, HELOCs and home equity loans are considered a cost-effective financing tool.4navigates to numbered disclaimer
Both have similar requirements
To qualify for either type of loan, homeowners must meet the lender’s requirements for minimum credit score, DTI, proof of stable income and employment, and an appraisal or AVM.
Both require closing costs and fees
Similar to traditional mortgages, HELOCs and home equity loans have closing costs and fees, but they are typically lower than traditional mortgage fees. You’ll know what fees are included prior to closing.
Pros and cons of home equity loans vs lines of credit
What may be right for one homeowner, may not be a good fit for another. Let’s briefly review the pros and cons of home equity line of credit vs home equity loans.
HELOCs
Pros
Flexible borrowing and repayment
Reusable credit line
Lower interest rates vs unsecured loans4navigates to numbered disclaimer
Cons
Traditional HELOCs have adjustable interest rates, which can be unpredictable
Risk of overspending with continuous access to funds
Risk of foreclosure if you fail to make payments
Home equity loans
Pros
Fixed interest rates
Lump-sum disbursement
Structured repayment
Lower interest rates vs unsecured loans
Cons
No flexibility once funds are disbursed
Potentially higher total interest costs
Risk of foreclosure if you fail to make payments
Which is better for you: a home equity line of credit vs a home equity loan?
The decision between a home equity loan vs HELOC largely depends on your financial needs and borrowing preferences.
Choose a HELOC if you prefer:
Flexible access to funds
A revolving credit line
Choose a home equity loan if you prefer:
A lump sum for the exact amount of cash you need
One-time loan with no additional borrowing
Home equity loans have a reputation for stability and predictability, but with Figure, your HELOC can operate similarly with a fixed rate for your initial draw, and your full loan amount drawn at the time of origination1navigates to numbered disclaimer.
Plus, homeowners can enjoy the additional flexibility that a traditional HELOC offers.
Turn your home’s equity into cash with Figure
HELOCs and home equity loans both provide homeowners with valuable ways to access cash. At the end of the day, it’s about finding a lender that aligns with your unique borrowing needs.
Figure offers borrowers a quick, fully online application that can grant approval in minutes and provide funding in as few as five days2navigates to numbered disclaimer. Our fixed-rate option provides more stability than traditional HELOCs’ variable rates, while maintaining the traditional flexibility to borrow as needed and pay interest only on what you use.1navigates to numbered disclaimer
Try our modern approach to home equity lending today. Get started here.
Frequently asked questions about HELOCs vs home equity loans
HELOC vs home equity loan closing costs: What’s the difference?
Both HELOCs and home equity loans typically come with closing costs. These may include appraisal fees, origination fees, title searches, and other lender charges. Figure does not charge account opening fees, maintenance fees, or prepayment penalties. We charge an origination fee, which is the cost for us to provide you with a loan and ranges from 0-4.99% of your initial draw. You may also be responsible for paying the costs of valuation if an AVM is not available for your property, manual notarization if your county doesn’t permit eNotary, and recording taxes, which vary by state and county.5navigates to numbered disclaimer
HELOC vs home equity loan rates: What’s the difference?
Traditional HELOCs typically have a variable interest rate, meaning it can change over time based on market conditions. A home equity loan, on the other hand, comes with a fixed interest rate, ensuring consistent monthly payments for the life of the loan. Some lenders, like Figure, offer HELOCs with a fixed-rate option, providing more stability than a traditional variable-rate HELOC.1navigates to numbered disclaimer
How can you obtain a HELOC vs HELOAN?
To qualify for a HELOC or home equity loan, you’ll typically need sufficient home equity, a good credit score, a low debt-to-income ratio (DTI), and a stable income. The application process varies by lender—traditional banks may take weeks to approve and fund your loan, while online lenders like Figure offer a fully digital application with funding available in as little as five days2navigates to numbered disclaimer.
How can you use home equity?
Homeowners can use home equity for a variety of purposes, including home renovations, debt consolidation, education expenses, medical bills, emergency funds, or even investment opportunities. The key is to choose a borrowing option that aligns with your financial goals and repayment ability.
