Understanding the Differences Between a HELOC and Home Equity Loan

Home Being Renovated

When it comes to leveraging the equity in your home, two popular options are a Home Equity Line of Credit (HELOC) and a Home Equity Loan. Both offer the opportunity to borrow against the value of your home, but they serve different financial needs and have unique characteristics. In this article, we’ll delve into the key differences between a HELOC and a Home Equity Loan, helping homeowners in Wilmington, North Carolina, and beyond make informed decisions.

What is Home Equity?

Before comparing the two types of loans, it’s essential to understand what home equity is. Equity is the difference between the current market value of your home and the amount you owe on your mortgage. For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity.

Home Equity Loan: A Closer Look

A Home Equity Loan, often referred to as a second mortgage, is a one-time lump sum loan that homeowners borrow against the equity in their home. It’s a type of secured loan where your home acts as collateral.

Key Features:

  • Fixed Amount: You borrow a set amount of money upfront.
  • Interest Rate: Typically, Home Equity Loans have a fixed interest rate, meaning your monthly payments remain constant over the life of the loan.
  • Repayment Terms: These loans have a fixed repayment term, usually ranging from five to 30 years.
  • Usage: Ideal for those who need a specific amount of money for a one-time expense, like a major home renovation or consolidating high-interest debt.
A Man Installing Tile in a Kitchen

A Man Installing Tile in a Kitchen

Home Equity Line of Credit (HELOC): An Overview

A HELOC is more like a credit card secured against your home. It gives you a revolving line of credit that you can draw from as needed, up to a certain limit.

Key Features:

  • Revolving Credit: Instead of receiving a lump sum, you get access to a line of credit that you can draw from as needed.
  • Variable Interest Rate: HELOCs typically have variable interest rates, meaning your payments can fluctuate based on interest rate changes.
  • Draw Period and Repayment Period: HELOCs usually have a draw period (often 10 years) during which you can access funds. After this period, you enter a repayment period where you can’t draw additional funds and must start paying back the principal and interest.
  • Usage: Ideal for ongoing expenses, such as tuition payments, or for having a financial cushion for unexpected costs.

Comparing HELOC and Home Equity Loan

  1. Disbursement of Funds: Home Equity Loans provide a lump sum at the beginning, while HELOCs allow you to draw funds as needed.
  2. Interest Rates: Home Equity Loans usually come with fixed interest rates, making budgeting easier. HELOCs often have variable rates, which can mean lower rates initially but with the risk of increase over time.
  3. Repayment Structure: Home Equity Loans have a predictable monthly payment. In contrast, HELOC payments can change based on how much you borrow and the prevailing interest rates.
  4. Flexibility: HELOCs offer more flexibility as you can borrow and repay as needed during the draw period. Home Equity Loans are a one-time transaction.
  5. Risk Factors: Both options put your home at risk if you default on the loan. However, the variable interest of a HELOC adds a level of unpredictability.

Choosing the Right Option

Deciding between a HELOC and a Home Equity Loan depends on your financial situation and goals:

  • If you need a specific amount of money for a one-time expense and prefer the stability of fixed payments, a Home Equity Loan might be the right choice.
  • If you’re looking for flexibility and don’t mind variable interest rates, a HELOC could be more suitable, especially if your borrowing needs are spread over time.


Both HELOCs and Home Equity Loans are powerful tools for homeowners looking to tap into their home’s equity. The choice depends on your financial needs, risk tolerance, and borrowing preferences. It’s essential to carefully consider the terms and conditions of each option and perhaps consult with a financial advisor to understand which option best suits your needs.

In the dynamic real estate landscape of Wilmington, North Carolina, and surrounding counties, understanding these financial instruments can empower homeowners to make smarter decisions, whether it’s for home improvements, debt consolidation, or other financial goals. As always, it’s crucial to weigh the risks and benefits and choose a path that aligns with your long-term financial health.

About the Author
Meghan Henderson
Meghan is the Marketing Specialist for The Cameron Team and a published author of two young adult books. She also creates digital and printable planners and trackers, as well as coloring pages for Larkspur & Tea.