Home Equity Loan vs. Home Equity Line of Credit

Looking to pay off high-rate loans with one fell swoop? Need options to pay for home renovations or a new roof? Since you most likely don’t have that kind of money tucked under your mattress, the most natural place to search for that money is your single greatest asset: your house.

But before you dip into those funds, you need to know just what you’re walking into. Putting your house at risk is not for the ill-informed or undisciplined.

The first step in digging into your home equity is to consider your choices. There are two primary ones: a home equity loan or a home equity credit line (HELOC). Here is a helpful guide to the fundamental distinctions between the two, with pros and cons.

Helpful Tips on the Home Equity Loan

Home equity loans are, at the core of the matter, a second mortgage. You can obtain a lump sum at a set interest rate that is locked in until you buy the loan. You are required to pay it back in fixed recurring installments for a fixed period of time—usually 10 to 15 years.


Your interest rate is fixed, which means that there will be no shocking changes later on down the road.

Since fees are due on a monthly basis, this is a nice choice if you have a rough time practicing the consistency required to pay off a debt on your own at a time.

The interest rate on the HEL, though higher than that on your main mortgage, would also be cheaper than the interest rate on the credit card.

If you use your HEL to pay off credit cards, in addition to reduced interest rates, you will benefit from the restructuring of all your loans into one bill.

Interest on your home equity debt might be tax-deductible, so you’ll want to read out in depth IRS Publication No. 936.


You borrow (and owe interest on) the entire amount, rather than borrowing and accruing interest on what you need.

If you use the equity to fund anything that requires multiple payments over time—say, for example, a staggered home renovation scheme or quarterly payments for higher education—you’ll have to make careful that you don’t waste the funds on other things in the interim.

You could be prevented from renting out your home under the terms of your loan.

If you can’t afford the payments, you risk losing your house.

Hello, HELOC

The home equity line of credit, on the other hand, works much like a credit card – using the home as leverage. You apply for a line of credit, and the lender assigns the maximum amount you can borrow — a credit cap.

Unlike the home equity loan, the credit line helps you to borrow everything you need, when you need it, up to the full amount accepted. Here are the pros and cons.


You don’t have to borrow a lump sum; you can redeem the money when you need it.

Interest rates, though volatile, can also be cheaper than most types of consumer credit, since they are backed by collateral (your house.)

The interest on your HELOC can be tax-deductible, just as it is on the home equity loan, so please check IRS Publication No. 936 to confirm what applies to your specific situation.


When the term of the loan ends, the remainder of the loan is due in full.

Lenders find it very easy to tap the funds; you have to be disciplined enough to stop unless there is an emergency or expected spending that is worth losing your house.

You could be prevented from renting out your home under the terms of your loan.


If it’s a home equity loan or a home equity line of credit, consider it a successful choice only if you have the discipline to use the funds for a committed cause, spend the money on anything of critical value, and you can return it on time. If that’s you, tapping into your home equity may be a helpful tactic to meet your goals.

Give us a call at 303-458-6660 or email us at mortgagedepartment@rmlefcu.org if you have any questions.