HOME BUYING
From Listings to Living
Say you own a house in Denver worth $500,000, you owe $300,000 on a mortgage you locked at 3.1 percent in 2021, and you need about $60,000 for a kitchen and a new roof. A cash-out refinance would replace that low rate on the whole balance, so you ask about borrowing against the equity instead. One lender offers a home equity loan; another offers a home equity line of credit. (These figures are illustrative.)
The difference between HELOC and home equity loan products comes down to how the money arrives and how the rate behaves. The CFPB describes a home equity loan as a specific amount borrowed in a lump sum, with a fixed or adjustable rate, and a HELOC as a line of credit you can draw on repeatedly, usually at an adjustable rate, with payments that change with the balance. If you already have a mortgage, either one is a second mortgage you pay on top of the first.
Both put a lien on your home. A home equity loan suits a single expense with a known price. A HELOC suits costs that arrive in stages or that you may not need at all, as long as you can absorb a payment that can rise.
Leevli Editorial Team
| Home equity loan | HELOC | |
|---|---|---|
| How you get the money | One lump sum at closing | Draw what you need, when you need it, up to a limit |
| Rate | Usually fixed | Usually variable: an index plus a margin |
| Payments | Equal payments that repay the loan over the term | Change with the balance and the rate; often lower during the draw period, higher in repayment |
| Phases | One repayment schedule from day one | Draw period, then repayment period |
| If you need more later | Apply for a new loan | Borrow again as you repay, while the line is open |
| Lender can freeze or cut access | Not applicable once funded | Yes, in defined situations such as a significant drop in home value |
| Security | Lien on your home | Lien on your home |
The CFPB frames the HELOC vs home equity loan choice the same way in the comparison table of its HELOC booklet: equal payments that pay off the entire loan for a home equity loan, against the freedom to keep repaying and borrowing for several years without new approvals for a HELOC. For both, it marks your home as at risk and notes that repayment is often required when you sell.
A HELOC has two lives. During the draw period you can spend up to the limit; the CFPB's HELOC explainer gives 10 years as an example. Some plans require a minimum draw each time, or an initial draw at opening, and many set a minimum monthly payment based on the current balance.
When the draw period ends, borrowing stops and the repayment period begins. The CFPB says lenders often schedule repayment over 10 or 20 years, that monthly payments are often significantly higher once repayment starts, and that in some cases the whole balance comes due at once as a balloon payment.
The jump is easy to underestimate. Using the opening example, with illustrative rates:
| Scenario on $60,000 | Rate | Monthly payment |
|---|---|---|
| Home equity loan, 15-year fixed | 8.5% fixed | $590.84 from the first month |
| HELOC draw period, interest-only | 8.0% variable | $400.00 |
| Same HELOC balance repaid over 20 years | 8.0% | $501.86 |
| Same, if the rate has risen | 9.0% | $539.84 |
The interest-only payment looks cheapest, but it repays nothing. The fixed loan repays some principal from the first month, though early payments are still mostly interest, and our guide to the amortization schedule shows how each payment splits between interest and principal over the term. Some HELOCs let you convert part of the balance to a fixed rate, which the CFPB says usually costs a higher rate in exchange for predictability.
The lender can also change the line itself. According to the CFPB, if your home's value falls significantly, the lender may stop further draws, and it may freeze the line if your finances change and it doubts you can pay. A home equity loan, once funded, has no line to freeze.
A HELOC rate has two parts, according to the CFPB booklet: an index that tracks rates in the wider economy, often the U.S. prime rate or the Constant Maturity Treasury rate, and a margin the lender adds. The Federal Reserve Bank of St. Louis's FRED database put the bank prime loan rate at 7.00 percent on October 13, 2026, so a line priced at prime plus 1 would carry 8.00 percent that day. The index moves; the margin usually does not. Lenders sometimes offer an introductory rate for a short period, such as six months, before the regular formula applies.
A fixed-rate home equity loan is priced once, at closing, much like a fixed-rate first mortgage. If a lender offers points to lower that rate, the break-even math in our guide to points on a mortgage applies to a second lien just as it does to a first.
Shop both the same way: ask several lenders for written terms on the same day and compare the rate, the margin and index for a HELOC, the caps, the fees and the payment in repayment. The CFPB booklet suggests getting three HELOC estimates.
Some lenders waive HELOC costs and others charge them. The CFPB lists an appraisal fee, an application fee that might not be refunded if you are turned down, and closing costs such as attorney fees, title search, mortgage preparation and filing, property and title insurance and taxes. Lines can also carry annual fees and minimum-draw rules. Ask a home equity loan lender for the same itemized list, and compare the total in dollars, not only the rate.
Whether those costs can be financed instead of paid in cash depends on the lender. Our guide to rolling closing costs into a mortgage explains how that works on a first lien and what it does to the balance.
One protection applies to both. Under Regulation Z, most credit secured by your principal dwelling, other than the loan you use to buy or build it, can be rescinded until midnight of the third business day after closing, after you receive the rescission notice or after you receive all material disclosures, whichever comes last. HELOCs have a parallel rule, and the CFPB booklet says the lender must then return the fees you paid.
Lenders size both products using combined loan-to-value, or CLTV: all the debt secured by the home divided by its appraised value. The CFPB booklet puts it as a percentage of the appraised value minus what you owe on your mortgage. Each lender sets its own maximum. On the opening example, with illustrative caps:
Your credit, income and existing debts then decide whether you qualify for that much. If you live in a condo or HOA community, lenders count the dues when they measure your monthly obligations, as our guide to HOA fees and your mortgage explains.
Texas writes home equity limits into Section 50 of Article XVI of its constitution. The Texas Real Estate Research Center at Texas A&M summarizes them in what to know about home equity loans in Texas (July 2025):
If you own in Austin or Houston's Heights, those rules shape every offer you will see. Other states have their own consumer rules, so ask the lender which apply where you live.
The CFPB's advice is blunt: consider a HELOC only if you are confident you can keep up with the payments, because if you fall behind you could lose your home. The same is true of a home equity loan. Both are liens recorded against the property, and our explainer on how to define lien types covers what that means for selling and refinancing later.
Four risks deserve a line each:
If you are deciding between a second lien and replacing your first mortgage, our hub on types of mortgage loans compares the first-lien options. Owners with an unusually low rate sometimes keep it for the same reason buyers chase assumable mortgage listings: a cheap first lien is hard to replace.
The interest is not automatically deductible. IRS Publication 936, the version for 2025 returns, says that no matter when the debt was incurred, you can no longer deduct interest on a loan secured by your home to the extent the proceeds were not used to buy, build or substantially improve that home. The publication adds that the loan must be secured by your main or second home, and you must itemize deductions on Schedule A.
Dollar limits also apply. Interest is deductible on up to $750,000 of qualifying mortgage debt, or $375,000 if married filing separately, with higher limits of $1 million and $500,000 for debt incurred before December 16, 2017. The cap covers the first mortgage and the home equity debt together.
Applied to the opening example, interest on a $60,000 loan spent on a kitchen and roof for the same house can qualify, subject to itemizing and the limits. Interest on the same loan used to pay off credit cards or buy a car does not. Keep receipts that tie the draws to the work, and confirm your own situation with a CPA or tax preparer.
Some owners open a HELOC on their current home to fund the down payment on the next one before the first sells. Fannie Mae's Selling Guide B3-4.3-15 accepts funds borrowed against an asset, including real estate, for the down payment, closing costs and reserves, because they represent a return of equity. The same section requires the lender to count the secured loan's monthly payment as a debt, and to calculate an equivalent payment if the loan does not require one.
That has three consequences. Your debt-to-income ratio has to absorb the HELOC payment, and usually the old home's payment too, until it sells. The HELOC is often due when that home sells. And under the Publication 936 rule above, interest on a HELOC secured by your old home but spent on a different home generally does not meet the buy, build or improve test for the home that secures it. If you would rather avoid the bridge entirely, our guide on how to save for a house covers building the down payment in cash.
A home equity line is one way owners cover a large association bill. Say you own a condo in Brickell and the board votes a special assessment of $25,000 per unit, an illustrative figure. A HELOC lets you pay the installments as they come due; a home equity loan suits a single lump-sum payment. Our guides to the HOA special assessment and to the reserve study for a condo association show how to judge whether more assessments are coming before you borrow, and residents often hear about board discussions first, which is what Ask a Resident is for.
Lien priority matters too. In super lien states, part of the association's assessment lien can rank ahead of the first mortgage, which leaves a second lender further back. Our article on the HOA lien lists the states and the limits.
Neither in general. A home equity loan fits a known, one-time cost and a budget that needs a fixed payment. A HELOC fits staged or uncertain costs and borrowers who can handle a payment that may rise. Before choosing, write down the total amount, how fast you will spend it, how you will repay it and what happens if rates go up 2 points. A lender or a HUD-approved housing counselor can run the numbers with you; the decision on the tax side belongs with a CPA.
Equity decisions in a condo or HOA community depend on bills that residents usually hear about first.
Listings show the property, but they rarely explain the lived reality around it. On Leevli, a mover can explore the city, review neighborhood and building information, and ask a verified resident the specific questions that remain unanswered. That human layer helps readers know what to investigate before signing a lease, making an offer, or choosing between two addresses.
A home equity loan gives you one lump sum, usually at a fixed rate, with equal payments that repay it over the term. A HELOC is a line of credit you draw on as needed during a draw period, usually at a variable rate, followed by a repayment period. Both are secured by your home and, if you already have a mortgage, sit behind it as second liens.
It depends on how you will spend the money. For a single, known cost such as a roof, a fixed home equity loan gives a predictable payment. For staged costs or an emergency reserve, a HELOC lets you borrow only what you use. A common mistake is choosing a HELOC for its low interest-only payment without budgeting for the higher payment in repayment.
Most HELOC rates equal an index plus a margin. Common indexes are the U.S. prime rate and the Constant Maturity Treasury rate. FRED showed the bank prime loan rate at 7.00 percent on October 13, 2026, so prime plus 1 meant 8.00 percent that day. When the index moves, your rate and payment move with it, even if your balance does not change.
The CFPB gives 10 years as an example of a draw period, and says repayment periods often run 10 or 20 years after that. Some plans instead require the full balance at the end of the draw period as a balloon payment. Check the agreement for both periods, the minimum payment rules and whether you can convert part of the balance to a fixed rate.
Sometimes. IRS Publication 936 allows the deduction only when the proceeds buy, build or substantially improve the home that secures the loan, the debt fits within the $750,000 total limit ($375,000 married filing separately), and you itemize. Interest on money used for debt consolidation, tuition or a car is not deductible under those rules. A CPA can confirm how it applies to you.
Often, yes. Fannie Mae accepts funds borrowed against real estate you own for a down payment, closing costs and reserves, but the lender must count the HELOC payment as debt when qualifying you. That usually means qualifying with two housing payments plus the line until your old home sells. Expect the HELOC to be due when that sale closes.
Lenders set a maximum combined loan-to-value. On a $500,000 home with a $300,000 mortgage, an 80 percent cap allows up to $100,000 and an 85 percent cap up to $125,000, before income and credit checks. In Texas, the constitution caps the home equity loan plus all other debt secured by the home at 80 percent of fair market value.
Timelines vary by lender, appraisal and title work. One federal step always adds time: on most loans secured by your principal dwelling, the lender may not release the funds until the three-business-day rescission period ends. In Texas, the lender must also deliver a separate written notice at least 12 days before closing, so plan renovation start dates around both.
Yes, in defined situations. The CFPB says a lender may stop further draws if your home's value falls significantly, or if your financial situation changes and the lender doubts you can repay. Ask for the reason in writing, check your credit reports for errors, and ask whether a new appraisal would restore the line. Another lender's line may also replace it.
Some lenders waive up-front costs; others charge an appraisal fee, an application fee and closing costs such as title search, recording, attorney and insurance charges. Lines can also carry annual fees and minimum draw requirements. Compare total dollar costs across at least three written offers, and remember that Texas caps most fees on home equity loans at 2 percent of the original principal.
This article is informational and does not constitute legal, financial, tax or insurance advice.
