Difference Between a HELOC vs. a Home Equity Loan

If you're looking to tap into the equity you've built up in your home, you’ve likely come across two popular options: the Home Equity Line of Credit (HELOC) and the Home Equity Loan. While both products allow homeowners to access their home equity, they work in very different ways. Choosing the right option depends on your financial goals, how much flexibility you need, and your ability to manage payments.

Let’s explore the key differences between a HELOC and a home equity loan, so you can make an informed decision.

What is a Home Equity Loan?

A home equity loan is a fixed loan product. Essentially, it allows you to borrow a lump sum of money based on the equity in your home. Here are the key features of a home equity loan:

• Fixed Loan Amount: You receive the entire loan amount upfront and make fixed payments over a specified term.

• Fixed Interest Rate: The interest rate is set for the entire loan term, providing predictable monthly payments.

• Fixed Term: The loan has a maturity date, meaning it will need to be renewed or refinanced when the term ends, similar to a conventional mortgage.

• Predictable Payments: Payments are structured so that part of each payment goes toward interest and principal, making it easier to budget since payments stay the same throughout the loan term.

• Second Mortgage Option: A home equity loan is often registered as a second mortgage, meaning it sits behind your first mortgage, allowing you to keep your existing mortgage untouched.

What is a Home Equity Line of Credit (HELOC)?

A Home Equity Line of Credit (HELOC) is a revolving loan product, functioning much like a credit card secured by your home. It provides ongoing access to a pre-approved credit limit that you can draw from as needed. Here are the key features of a HELOC:

• Revolving Credit: You’re approved for a credit limit, and you can borrow from it at any time. As you repay the balance, those funds become available again.

• Interest-Only Payments: Most HELOCs allow you to pay only the interest on the amount you’ve borrowed, making the payments lower initially.

• Variable Payments: Since payments depend on how much of the credit limit you've used, your payments can fluctuate from month to month.

• No Maturity Date: A HELOC is open-ended—there’s no fixed term, and you don’t need to renew or requalify unless your lender reviews your account for changes.

• Second Mortgage Option: Like a home equity loan, a HELOC can also be registered as a second mortgage, keeping your existing first mortgage intact.

Key Differences Between a HELOC vs. a Home Equity Loan

1. Fixed Loan vs. Revolving Credit

• Home Equity Loan: You receive a one-time lump sum with a fixed payment schedule.

• HELOC: You can borrow as needed, repay the balance, and borrow again, similar to how a credit card works.

2. Payment Structure

• Home Equity Loan: Payments are fixed and cover both principal and interest, making them predictable.

• HELOC: Payments vary depending on how much of the credit limit you've used. Typically, the minimum payment is interest-only, but you can pay more toward the principal anytime.

3. Loan Term and Renewal

Home Equity Loan: Comes with a fixed term (like one - two years) and must be renewed or refinanced when the term ends.

HELOC: No fixed term—you can keep the line of credit open indefinitely, as long as you make your payments.

4. Interest Rate Stability

Home Equity Loan: The interest rate is fixed for the loan term, providing stability.

HELOC: The interest rate can be variable or fixed depending on who the lender is.

Should You Choose a HELOC vs. a Home Equity Loan?

The decision between a HELOC and a home equity loan comes down to your financial needs and goals. Here are some scenarios to help you decide which product is best for you:

Reasons to Choose a Home Equity Loan:

1. You need a lump sum upfront for a major purchase, such as home renovations, debt consolidation, or a large one-time expense.
2. You prefer fixed monthly payments and interest rate stability for easier budgeting.
3. You want to borrow a specific amount and pay it off gradually over time with a predictable repayment schedule.

Reasons to Choose a HELOC:

1. You want ongoing access to funds, such as for ongoing renovations or emergency expenses.
2. You prefer flexible payments—for example, you want the option to make interest-only payments or pay down the principal when it suits your budget.
3. You’re comfortable with variable payments and the possibility of changing interest rates.

What Are The Advantages of HELOCs and Home Equity Loans

Both HELOCs and home equity loans are popular options for homeowners who need access to their home equity without touching their first mortgage. For example, if you have a low-interest first mortgage, refinancing it to access equity might not make sense, especially if today’s rates are higher. Using a HELOC or a home equity loan as a second mortgage allows you to tap into your equity without breaking your first mortgage and incurring penalties.

These products are also helpful for debt consolidation, where homeowners can combine high-interest credit card debt into a single payment at a lower interest rate. Both a HELOC and a home equity loan provide opportunities to free up cash flow and better manage monthly expenses.

How to Choose Between HELOC vs. Home Equity Loan

Ultimately, the decision between a HELOC and a home equity loan depends on your financial needs, your comfort with payment flexibility, and your long-term goals. If you prefer predictable payments and know exactly how much you need, a home equity loan might be the better fit. On the other hand, if you need flexible access to funds and are comfortable with fluctuating payments, a HELOC could be the way to go.

Regardless of which product you choose, both offer homeowners a powerful way to tap into home equity without breaking their first mortgage—making them valuable tools for debt consolidation, renovations, or managing large expenses.

Before making a decision, consider speaking with a mortgage broker who can help you understand your options, find the right lender, and structure a loan that aligns with your financial goals.

Case Study: How a Home Equity Loan Transformed Shona's Life

Shona’s story is one that many homeowners can relate to. With a credit score of 620 and debt servicing ratios of 52/63, she found herself in a tricky financial situation. Although she had built up significant equity in her home, her high monthly debt payments left little room for savings or improvements. Frustrated but determined, Shona knew it was time to take control of her finances, consolidate her debt, and complete much-needed renovations on her home.

A Plan for Change: Consolidating Debt and Financing Renovations

Shona was determined to make things better. She wanted to consolidate her debt into one manageable payment and access funds to update her home with modern trends. The solution seemed simple—tap into her home equity. Confident, she approached her bank hoping for a Home Equity Line of Credit (HELOC). A HELOC would allow her to borrow as needed, offering the flexibility to start her renovations on her own timeline.

Unfortunately, her bank denied her application due to her high debt servicing ratios. With a total debt load of 52% of her gross income and overall obligations climbing to 63%, she didn’t fit into the bank’s strict approval guidelines. Disappointed but not discouraged, she turned to a mortgage broker to explore other options.

Exploring New Avenues: Home Equity Loan vs. HELOC

The mortgage broker patiently explained Shona’s options. He outlined the differences between a HELOC and a home equity loan:

HELOC:

• Offered mainly through institutional lenders.

• Requires stricter approval guidelines (good credit and lower debt servicing ratios).

• Provides flexibility since it’s a revolving credit product—borrow as needed, pay interest only on the balance used.

Home Equity Loan:

• Available through both institutional lenders and alternative private lenders, offering more flexible approval.

• Fixed payment schedule and loan term, making budgeting easier.

• Offers immediate access to the full loan amount, making it ideal for consolidating debt and funding renovations all at once.

Shona loved the flexibility of a HELOC, but the broker gently reminded her that her current debt servicing ratios exceeded institutional lender limits. This meant that qualifying for a HELOC wasn’t possible at the moment. Private lenders were more flexible, but a HELOC was still off the table.

Disappointed but understanding her options, Shona decided to move forward with a home equity loan. She realized that taking this step would allow her to pay off high-interest debts, free up her cash flow, and fund her renovations without waiting for her financial profile to improve.

Results

Once her home equity loan was approved, Shona received enough funds to consolidate all her debt into a single, lower-interest loan. The result? She reduced her monthly payments by $800, giving her the financial breathing room she desperately needed.

With the remaining loan proceeds, she was able to set aside $30,000 to complete her home renovations. This allowed her to upgrade her kitchen, remodel the bathrooms, and modernize her living spaces—improvements that not only increased her home’s value but also boosted her quality of life.

One Year Later: A Transformed Financial Picture

After a year of careful planning and diligent payments, Shona’s situation had improved dramatically. By staying on top of her new loan payments, her credit score climbed from 620 to 690—a significant improvement that opened new doors.

The renovations she completed also increased the value of her home, giving her more equity to work with. Feeling more confident about her finances, Shona reached out to her bank once again—this time to see if she could consolidate her first mortgage and home equity loan into one mortgage with a better rate.

Thanks to her improved credit score and lower debt servicing ratios, her bank approved the consolidation. Shona was able to lock in the lowest interest rate available on the market, further reducing her monthly payments. This allowed her to restructure her finances, save money each month, and focus on building a secure future.

The Power of Persistence and the Right Guidance

Shona’s journey highlights the importance of exploring all your options when facing financial challenges. Although she initially hoped for a HELOC, she found a solution that not only resolved her immediate concerns but also set her up for long-term success.

Her story is a testament to the fact that the right mortgage broker can make all the difference. While banks often have strict lending criteria, mortgage brokers have access to a broader network of lenders—including private lenders—offering more flexible solutions for those with credit challenges or high debt ratios.

Is a Home Equity Loan Right for You?

If you find yourself in a situation similar to Shona’s—facing high debt payments or needing funds for renovations—it’s worth considering a home equity loan. Here are a few questions to help you decide:

1. Do you need funds immediately for a project or debt consolidation?

2. Do your current debt levels or credit score prevent you from getting approved with your bank?

3. Would a fixed loan with predictable payments help you better manage your budget?

4. Do you want to avoid breaking your first mortgage to access equity?

If the answer to any of these questions is yes, a home equity loan might be the right solution for you.

Case Study Takeaway

In the end, Shona’s story demonstrates the importance of being flexible and open to alternative solutions. While her initial plan didn’t work out the way she hoped, she found a better path with the help of her mortgage broker. With her debts consolidated, her renovations complete, and her credit score improved, Shona is now in a stronger financial position—ready to move forward with confidence.

If you’re facing financial challenges or considering accessing your home equity, working with a trusted mortgage broker can open doors you might not have realized were available. Like Shona, you could find a solution that not only resolves your immediate needs but also sets you up for long-term financial success.