HELOC vs Home Equity Loan: Which Is Right for You

When you’ve built up equity in your home, it can become a valuable tool for achieving financial goals; whether you're funding a renovation, consolidating debt, or covering major expenses. But choosing between a home equity loan or a home equity line of credit (HELOC) isn’t always straightforward. These options both fall under the umbrella of second mortgage loans, and while they tap into the value of your home, their structure, flexibility, and repayment terms differ in meaningful ways.

Below, we’ll walk through the key differences and help you determine which option might be best for your situation.

Key Takeaways

• A home equity loan provides a fixed lump sum with predictable monthly payments.

• A HELOC functions as a revolving credit line that you can draw from as needed.

• Closing costs and interest structures differ between the two. 

• Your home’s appraised value, credit score, and financial needs can guide the right fit.

• Always consider long-term financial stability, and talk with your lender before choosing.

Understanding the Basics

Before diving into which loan makes sense for you, let’s define the options.

A home equity loan is a type of second mortgage that allows you to borrow a lump sum against your available home equity. You’ll repay the entire loan amount through fixed monthly payments at a fixed interest rate over a set term.

A HELOC, on the other hand, works more like a credit line. You’re approved for a maximum amount based on your available home equity, but you only draw what you need. 

Both loan types use your home as collateral and may be used for a wide range of financial goals, from home renovations and unexpected expenses to debt consolidation or college tuition.

 

Key Differences to Know

1. Interest Rates and Repayment

Home equity loans typically have a fixed interest rate, which means consistent payments month after month. This structure is ideal if you want predictability or are budgeting for a one-time expense, such as a large lump sum payment for remodeling or medical bills.

HELOCs, however, often come with a variable interest rate, which can fluctuate depending on market conditions. If budgeting is a concern, this variability could be a key factor.

2. Flexibility and Access to Funds

A HELOC provides greater flexibility for ongoing projects or cash flow needs. You can access funds repeatedly up to your credit limit, and only pay interest on the amount you borrow. This setup is useful for long-term expenses like phased home upgrades or funding business ideas.

With a home equity loan, you receive all funds upfront. It’s ideal for situations where you know your costs and want the stability of a fixed monthly payment.

3. Closing Costs and Fees

Both loan types may include application fees, closing costs, and potentially an annual fee for HELOCs. Because these loans use your property as security, your credit score, loan-to-value ratio, and outstanding mortgage balance will impact your approval and rates.

Some lenders may waive or reduce closing costs to stay competitive, especially if you’re a current customer. Always ask for a loan estimate and compare offers.

4. Credit and Qualification Factors

Lenders typically require a good credit score, steady income, and a combined loan-to-value (CLTV) ratio below 80%. They’ll review your credit report, payment history, and the current value of your home. If you still have a large primary mortgage, your available equity could be limited.

Farmers Bank offers personalized options and will walk you through the details to ensure the product fits your individual circumstances.

 

HELOC vs Home Equity Loan: How to Decide

Both options serve different financial needs. The better fit depends on your goals, comfort with risk, and how soon you’ll need funds.

Use a home equity loan if:

• You need a lump sum for a major one-time cost.

• You want fixed rate payments over a specific term.

• You’re consolidating high-interest debt and want predictable budgeting.

Consider a HELOC if:

• You’re covering ongoing expenses or uncertain costs.

• You want flexibility to borrow money as needed.

• You plan to pay the balance quickly or only use a portion.

Both options can be powerful financial tools when used thoughtfully. They’re often more cost-effective than personal loans and can carry lower interest rates than credit cards.

 

Why Farmers Bank?

We bring decades of local experience and a relationship-first approach to every conversation. Whether you’re exploring a second mortgage, want guidance on managing repayment terms, or are weighing a cash out refinance, we’ll meet you with honest advice and helpful tools.

As a Member FDIC, Farmers Bank is committed to transparent service, flexible solutions, and helping our neighbors make the most of their home’s equity.  Learn more in our blog.

 

Let’s Find the Right Fit Together

Deciding between a home equity line of credit and a home equity loan doesn’t need to feel overwhelming. With the right information, a clear understanding of your financial goals, and support from an experienced team, you can make a confident choice.

Whether you need money upfront for a large expense or prefer a revolving credit option for flexible spending, we’re here to help you navigate every step.

Contact your local Farmers Bank branch today to learn more, compare options, and start your application with support you can trust.

 

FAQs

What’s the biggest difference between a HELOC and a home equity loan?

A HELOC is a revolving credit line you can draw from over time, while a home equity loan is a one-time lump sum with fixed payments. Both use your home as collateral.

Is a HELOC or home equity loan better for debt consolidation?

A home equity loan is typically better for consolidating debt due to fixed payments and consistent interest rates. Our team can help determine what works best based on your situation.

Can I get a HELOC or home equity loan if I still have a mortgage?

Yes. These products are considered second mortgages and can be approved if you have enough equity.

Are interest payments on these loans tax-deductible?

In many cases, yes—especially if the funds are used for home improvements. We recommend speaking with a tax advisor to confirm what applies to you.

What’s the application process like?

You’ll typically need proof of income, details about your current mortgage, and your home’s value. Farmers Bank makes the process smooth and personalized.