Home Equity Loan Or HELOC? Comparing The Benefits, Drawbacks, And Best Uses

Key Takeaways: 

• Structural Comparison: Learn the key structural differences between a lump-sum home equity loan and a flexible HELOC, including interest types and repayment models.
• Choosing the Right Option: Discover which borrowing option suits your situation best—fixed costs for one-time needs or flexible access for ongoing expenses.
• Expert Guidance from ICON: Get expert-backed advice from ICON on how to use your home equity wisely while minimizing financial and property tax risks.

When it comes to managing your home’s equity, making informed borrowing decisions is just as important as minimizing your tax burden. Many homeowners are turning to equity-based financing tools like Home Equity Loans and HELOCs (Home Equity Lines of Credit) to fund renovations, consolidate debt, or cover life’s big expenses. But with both options tied directly to your most valuable asset—your home—understanding the pros, cons, and ideal use cases is critical.

At ICON, we don’t just navigate the property tax landscape—we define it. With millions of dollars saved for homeowners and commercial property investors across Texas, our team is trusted for one reason: results. ICON is built on a foundation of real-world expertise, relentless advocacy, and data-driven strategies that protect your bottom line and unlock the full potential of your property’s value.

In this piece, we’ll break down the differences between a Home Equity Loan and a HELOC, explore when each makes sense, and help you choose the right path forward with insight from ICON’s property value experts.

What Is A Home Equity Loan?

A home equity loan is a type of loan that allows you to borrow against the equity you’ve built up in your home. Equity is the difference between the current market value of your home and the outstanding balance on your mortgage. When you take out a home equity loan, you receive a lump sum of money upfront, which you then repay over a set period with a fixed interest rate.

This type of loan is sometimes referred to as a second mortgage because it’s secured by your home, just like your original mortgage. Typically, repayment terms range from 5 to 30 years, and your monthly payments remain consistent throughout the loan’s life.

Key Features:

• Fixed interest rates: Your payments are predictable and stable.
• Lump sum disbursement: You get all the money at once.
• Secured loan: Your home serves as collateral.
• Structured repayment: Fixed monthly payments over a set term.

Home equity loans are often used for major expenses like home renovations, debt consolidation, or covering large, one-time costs such as medical bills or tuition.

What Is A HELOC (Home Equity Line Of Credit)?

A HELOC, or Home Equity Line of Credit, is a revolving line of credit that also uses your home’s equity as collateral—but unlike a home equity loan, it works more like a credit card. Instead of receiving a lump sum, you’re approved for a credit limit and can borrow from it as needed during a draw period, which typically lasts 5 to 10 years.

During the draw period, you can withdraw funds, repay them, and borrow again, similar to how a credit card works. After this period ends, you enter the repayment period, which may span 10 to 20 years, during which you can no longer draw funds and must repay the outstanding balance.

Key Features:

• Variable interest rates: Monthly payments may fluctuate.
• Revolving credit: Borrow what you need, when you need it.
• Draw and repayment periods: Separate phases for borrowing and repaying.
• Interest-only payments during draw period: Lower initial monthly costs.

HELOCs are popular for ongoing or unpredictable expenses such as home improvement projects, emergency funds, or supplemental income for education or medical needs.

Key Differences Between A HELOC And A Home Equity Loan

While both HELOCs and home equity loans let you borrow against your home’s equity, they are structured differently. Understanding these differences helps you make a more informed financial decision.

Disbursement

A home equity loan provides a lump sum upfront, which is ideal for large, one-time expenses. In contrast, a HELOC gives you access to a revolving credit line that you can draw from as needed during the draw period.

Interest Rate Structure

Home equity loans come with a fixed interest rate, offering predictability in your monthly payments. HELOCs usually have variable rates, meaning your payments can rise or fall over time depending on market conditions.

Repayment Terms

With a home equity loan, repayment begins immediately with fixed monthly payments. A HELOC typically allows interest-only payments during the draw period, followed by a repayment period where you pay back both principal and interest.

Flexibility

Home equity loans are best for planned expenses where you know the exact amount you need. HELOCs offer more flexibility, making them useful for ongoing or unpredictable costs like home renovations or medical expenses.

Risk Tolerance

If you prefer stable payments and lower risk, a home equity loan may suit you better. A HELOC could be a good fit if you’re comfortable managing changing interest rates and variable payments.

Benefits Of A Home Equity Loan

Home equity loans offer several advantages, especially for homeowners who value predictability and financial planning. They are a solid choice for funding large, one-time expenses.

Fixed Interest Rate

One of the biggest benefits is the fixed interest rate, which keeps your monthly payments stable over the life of the loan. This makes budgeting easier and eliminates surprises from fluctuating rates.

Lump Sum Payment

You receive the entire loan amount upfront, making it ideal for major expenses like home renovations, medical bills, or consolidating high-interest debt. This structure is helpful when you know exactly how much money you need.

Predictable Repayment Terms

Repayment begins right away with a set monthly amount, offering a clear timeline to pay off the debt. This helps avoid the uncertainty that can come with variable-rate products.

Benefits Of A HELOC

A HELOC offers flexibility and convenience, making it a practical option for homeowners with ongoing or fluctuating financial needs. It’s particularly useful when you don’t need all the funds upfront.

Flexible Access To Funds

You can borrow as much or as little as you need, up to your approved credit limit. This makes HELOCs ideal for projects or expenses that occur over time, like phased home improvements.

Lower Initial Payments

During the draw period, many HELOCs require only interest payments, which can significantly reduce your initial monthly costs. This can be helpful if you’re managing other financial obligations at the same time.

Reusable Credit Line

As you repay the borrowed amount, the funds become available again during the draw period. This revolving feature provides a safety net for unexpected expenses or changes in your financial situation.

Drawbacks To Consider

While both HELOCs and home equity loans offer access to your home’s equity, they come with certain risks and limitations. It’s important to weigh these drawbacks before committing to either option.

Risk Of Losing Your Home

Both options are secured by your home, meaning failure to repay could result in foreclosure. This adds a serious level of risk, especially if your financial situation becomes unstable.

Debt Accumulation

Access to large amounts of credit can be tempting and may lead to overspending. Without a clear repayment plan, you could find yourself in deeper debt over time.

Variable Interest With HELOCs

HELOCs typically come with variable interest rates, which means your monthly payments could increase unexpectedly. This can make it harder to budget and plan your finances long term.

Which Option Is Best For You?

Choosing between a home equity loan and a HELOC depends on your financial goals, spending habits, and comfort with risk. Each has strengths tailored to different situations.

Choose A Home Equity Loan If…

You have a specific, one-time expense in mind and want fixed monthly payments. This option is ideal for homeowners who prefer financial predictability and want to lock in a stable interest rate.

Choose A HELOC If…

You need flexible access to funds over time and can manage fluctuating payments. HELOCs are great for ongoing projects or as a financial safety net when expenses are less predictable.

Evaluate Your Financial Situation

Consider your income stability, credit score, and how much equity you have in your home. Consulting a trusted property tax or mortgage expert, like the team at ICON, can help guide you toward the smarter choice for your needs.

How ICON Can Help You Make The Right Choice

Navigating the pros and cons of a home equity loan versus a HELOC can be overwhelming, especially with so much at stake. That’s where expert guidance becomes invaluable.

Expert Advice Tailored To Your Needs

The team at ICON specializes in helping homeowners make smarter financial decisions based on their unique goals and property value. They understand the local market and can provide insights you might not find elsewhere.

Property Tax Strategy And Equity Insights

ICON not only offers loan guidance but also helps you optimize your home’s value through effective property tax strategies. This can directly impact how much equity you can tap into—and how wisely you use it.

Final Thoughts

Both home equity loans and HELOCs offer valuable ways to leverage the equity in your home, but the right choice depends on your specific financial situation and goals. Whether you need a lump sum for a big expense or flexible access to funds over time, understanding the structure, benefits, and risks of each option is key.

Take the time to evaluate your needs, budget, and risk tolerance before deciding. And don’t hesitate to seek expert guidance—partnering with professionals like ICON can make all the difference in making a smart, confident decision.

Frequently Asked Questions About Home Equity Loan And HELOC

What is the minimum credit score required for a HELOC or home equity loan?

While requirements vary by lender, most institutions prefer a credit score of 620 or higher for a HELOC and at least 660 for a home equity loan. Higher scores typically unlock better interest rates and loan terms.

Can you have both a HELOC and a home equity loan at the same time?

Yes, you can. If you have enough equity in your home, some lenders may approve you for both, but it increases your debt obligations and risk. It’s essential to manage payments carefully if you pursue both options.

Do home equity loans or HELOCs impact your property taxes?

Taking out a loan itself does not raise your property taxes. However, if you use the funds to improve your home significantly, your property value may increase, which could lead to higher property taxes. Companies like ICON can help you manage that risk.

Are the interest payments on HELOCs or home equity loans tax-deductible?

Interest may be deductible, but only if the funds are used to “buy, build, or substantially improve” the home securing the loan. Always consult a tax professional to determine your eligibility.

How does a cash-out refinance differ from a HELOC or home equity loan?

A cash-out refinance replaces your existing mortgage with a larger one and gives you the difference in cash. In contrast, HELOCs and home equity loans are separate from your primary mortgage and don’t require refinancing.

Can you use a HELOC or home equity loan for investment purposes?

Yes, you can use the funds for investing in things like rental properties, business ventures, or stock portfolios. However, this introduces more risk, and it’s crucial to have a strong financial plan in place.

How long does it take to get approved for a HELOC or home equity loan?

On average, approval takes 2 to 6 weeks, depending on the lender, required documentation, and home appraisal timelines. HELOCs may process slightly faster than home equity loans.

What happens if your home value drops after taking out a HELOC or home equity loan?

If your home’s value declines, you may end up “underwater,” owing more than your home is worth. This can limit future borrowing options and create challenges if you need to sell.

Can I pay off a HELOC or home equity loan early without penalty?

Many lenders allow early repayment without penalty, but some may charge a prepayment fee. Always review your loan terms carefully before committing.

Is it possible to convert a HELOC into a home equity loan?

Some lenders offer conversion features that allow you to lock in a portion of your HELOC at a fixed rate, mimicking a home equity loan. This is useful if you want to stabilize payments after using a large portion of your credit line.