HELOC vs. home equity loan: Pros weigh in on how to choose

If you're a homeowner thinking of tapping into your home equity, two common options you're likely evaluating are home equity lines of credit (HELOC) and home equity loans. Both products are great tools for accessing the value you've built in your home to fund everything from home improvements to debt consolidation. But each is better suited for different situations.

How can you decide which is right for you? We asked some experts for their opinions.

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HELOC vs. home equity loan: Pros weigh in on how to choose

HELOCs and home equity loans offer unique advantages and disadvantages. Here are the best uses for each, according to experts.

When a HELOC may be better for you

A HELOC is a revolving line of credit you can borrow from any time during the draw period, which typically lasts from five to 20 years. When this period ends, you begin repaying the amount you borrowed at a variable interest rate.

"[The] best way to think of a HELOC is a credit card," says John Boyd, CFP, founder and lead wealth advisor at MDRN Wealth. "A credit card provides capital if you need it, but if you don't use the credit card, you'll pay no interest. Same concept with a HELOC, except the collateral is your home."

This flexibility makes HELOCs an ideal source of financing for ongoing costs. "For example, if you want to renovate your home one room at a time and pay off the balance before moving onto the next room, rather than doing a massive renovation all at once, a HELOC is a better fit," says Deni Supplee, Realtor and cofounder of SparkRental.

Because you borrow only what you need when you need it — and you only pay interest on the amount you borrow — HELOCs can save you a considerable amount compared to home equity loans. Theresa Raymond, principal broker and owner at TN Smoky Mtn Realty, offers the following example for home renovations totaling $100,000, made over three years:

"With a HELOC, you can access funds as needed during the draw period, borrowing $50,000 in the first year, $30,000 in the second year and $20,000 in the third year. With an average interest payment of $3,000 per year, the total interest paid over three years is $9,000.

"In contrast, a home equity loan would require interest payments on the full $100,000 throughout the term, resulting in approximately $18,000 in interest payments. Therefore, opting for a HELOC can save around $9,000 in interest costs."

Using HELOC funds for home renovations could also get you a tax deduction. But there are other cases where this product could serve you well. Mike Qiu, real estate agent and owner of Good As Sold Home Buyers, suggests the following:

• As an emergency fund: "Unexpected financial emergencies, such as medical bills or home repairs, may require immediate access to funds. A HELOC provides homeowners with a safety net, allowing them to tap into their home's equity when urgent expenses arise."
• To supplement freelance income: "Individuals with variable income, such as freelancers or commission-based workers, may find a HELOC beneficial. It can serve as a reliable source of funds during lean periods, bridging the gap between income fluctuations."
• For additional cash flow in retirement: "Retirees seeking additional income or a backup fund during retirement can utilize a HELOC to supplement their financial resources, providing greater peace of mind and flexibility in managing expenses."

Explore your HELOC options online now!

When a home equity loan may be better for you

A home equity loan provides a lump sum of cash, which you begin repaying immediately at a fixed interest rate. Because you pay interest on the entire amount, this product is best when you need immediate access to a significant amount of money.

"Home equity loans work well for large one-time expenses, such as a home renovation," says Supplee. "You can borrow on a fixed interest rate — a major advantage when interest rates are low."

This interest rate advantage makes home equity loans especially helpful for consolidating high-interest debt. 

"Just imagine you have a credit card balance of $15,000 at an APR of 18.25%," says Raymond. "It would take 46 months and $3,629 in interest charges if you made a $300 monthly payment. Everything shifts, though, if you get a home equity loan at 5.49%. With a $300 monthly payment, you will pay off your debt in 37 months and $875 in interest."

As with a HELOC, home equity loan interest may be tax-deductible if you use the funds for IRS-approved home improvements. Other potential uses for these funds, per Qiu, include:

• To pay for education: "Funding higher education expenses, such as tuition fees or student loans, can be challenging. A home equity loan can offer a more favorable interest rate compared to alternative borrowing options, making it an appealing choice for financing education."
• As an alternative to other loans: "When purchasing a car, making a down payment on a second property, or investing in a business venture, a home equity loan can provide the necessary capital at a lower interest rate compared to other types of loans."

Start your search today by viewing current home equity offerings here.

The bottom line

"The decision between a home equity loan and a HELOC hinges on the specific needs and circumstances of homeowners," Qiu says. "A home equity loan is suitable for one-time expenses, debt consolidation and significant purchases, while a HELOC offers flexibility for ongoing needs, emergencies and irregular cash flows."

To determine which option is best for you, consider the pros and cons of each, your intended use for the funds and how much you can afford to repay over what timeline. When in doubt, consult a financial advisor for personal guidance.