HELOC vs Home Equity Loan in 2026: Which Is Better for Your Situation

Homeowners sitting on significant equity have two main options for tapping it: a home equity line of credit (HELOC) or a home equity loan. Both use your home as collateral, both are second mortgages behind your primary mortgage, and both can result in foreclosure if you stop making payments. Beyond those similarities, they work quite differently, and the right choice depends on why you need the money, how much you need, and how you expect to use it.

How a HELOC Works

A HELOC is a revolving line of credit, similar in structure to a credit card. You are approved for a maximum credit limit based on your home equity and creditworthiness, and you can draw from the line as needed during the draw period, which typically lasts 10 years. You only pay interest on the amount you have actually borrowed, not on the full available credit. As you pay down the principal, your available credit replenishes, similar to how a credit card works.

Most HELOCs have variable interest rates tied to the prime rate plus a margin. When the prime rate goes up, your HELOC rate goes up. When it goes down, your rate drops. In 2026, HELOC rates for well-qualified borrowers typically range from prime plus 0.5% to prime plus 2%, which translates to roughly 8-10% depending on current prime rate levels. Some lenders offer fixed-rate HELOCs or the ability to lock a portion of the balance at a fixed rate, which reduces the rate risk. After the draw period ends, the HELOC enters a repayment period typically lasting 20 years, during which you pay both principal and interest on the outstanding balance.

How a Home Equity Loan Works

A home equity loan is a traditional installment loan. You borrow a specific amount, receive a lump sum at closing, and repay it in fixed monthly payments over a fixed term, typically 5 to 30 years. The interest rate is fixed at origination and does not change. This predictability is the main advantage of a home equity loan over a HELOC. In a rising rate environment or for borrowers who want budget certainty, the fixed rate and fixed payment are attractive features.

Home equity loan rates in 2026 typically run slightly higher than HELOC rates because the lender is taking on the full interest rate risk at origination. Well-qualified borrowers with strong credit and low loan-to-value ratios can find rates in the 7.5-9% range. Rates are higher for borrowers with lower credit scores or for loans that represent a larger portion of the home's value. You pay interest on the full loan balance from day one, unlike a HELOC where you only pay on what you draw.

How Much You Can Borrow Against Your Home Equity

Lenders typically allow you to borrow up to 80-85% of your home's value combined across your first mortgage and the new second mortgage, leaving at least 15-20% equity in the home. The combined loan-to-value ratio (CLTV) is what matters. If your home is worth $500,000 and you owe $250,000 on your primary mortgage, you have $250,000 in equity. At an 80% CLTV, the maximum total debt would be $400,000. Subtracting the existing $250,000 mortgage, you could borrow up to $150,000 through a HELOC or home equity loan.

Some lenders go up to 90% CLTV for borrowers with strong credit. Going above 80% CLTV typically means a higher interest rate to compensate the lender for the additional risk. Use our home equity calculator to see how much you can borrow based on your specific home value and mortgage balance.

Tax Deductibility of Interest

Interest on a HELOC or home equity loan is tax-deductible only if the funds are used to buy, build, or substantially improve the home that secures the loan. If you use the money to renovate your kitchen, add a bathroom, or replace the roof, the interest is deductible. If you use the money to pay off credit card debt, fund a vacation, or invest in stocks, the interest is not deductible under current law, which changed with the 2017 Tax Cuts and Jobs Act.

The deduction is subject to the overall mortgage interest limitation of $750,000 in total qualified debt. For most homeowners, this is not a practical constraint. But it is important to track how you use the proceeds if you plan to claim the deduction. Mixing uses (some home improvement, some personal) requires careful documentation and potentially a prorated deduction. Consult a tax professional if your use of funds is mixed.

Closing Costs and Fees

Both HELOCs and home equity loans have closing costs, though many lenders offer reduced or waived closing costs to attract borrowers. Typical closing costs run 2-5% of the loan amount and include appraisal fees, origination fees, title insurance, and government recording fees. On a $100,000 loan, you might pay $2,000-$5,000 in closing costs. Some lenders waive closing costs but charge a slightly higher interest rate to recoup the expense over time.

HELOCs often have lower closing costs than home equity loans because there is no set loan amount to close on. However, HELOCs may have ongoing fees including annual fees ($50-$100), inactivity fees if you do not draw on the line, and early closure fees if you close the line within three years. Read the fee schedule carefully before choosing a lender.

Which Option Is Better for Different Situations

A HELOC works best when your funding need is ongoing and variable. Home renovations that happen in phases over 12-18 months, a business that needs working capital on a flexible basis, or education costs paid semester by semester are all situations where the flexibility of a HELOC is valuable. You draw only what you need, when you need it, and pay interest only on what is outstanding.

A home equity loan works best when you need a specific, known amount all at once and want payment certainty. Debt consolidation of a fixed amount, a single large home improvement project, or a major purchase where you know the exact cost are all situations where the home equity loan's lump-sum structure and fixed rate fit naturally. The fixed payment makes budgeting straightforward and eliminates rate risk. For broader context on your home's financial position, see our guide to common home equity mistakes to avoid and use our mortgage calculator to model how adding a second mortgage payment affects your monthly obligations.