Both products borrow against the same thing, and the CFPB describes that thing plainly: equity is the value of your home minus the amount you owe on your mortgage, and a home equity line of credit lets you borrow, spend and repay as you go, using the home as collateral.
The choice between a line and a closed-end loan is not really about rate. It is about whether you know the number. A line is built for a cost you cannot yet total. A closed-end loan is built for one you can.
The structural difference
| Feature | HELOC (line of credit) | Home equity loan (closed-end second) |
|---|---|---|
| How the money arrives | Draw what you need, when you need it, up to the credit limit | One lump sum at closing |
| Rate | Usually variable, tied to an index plus a margin | Usually fixed for the term |
| Payment | Varies with balance and rate. During the draw period the minimum may not reduce principal. | Equal payments that pay the loan off within the term |
| Phases | A draw period, then either renewal, a balloon, or a separate repayment period | One phase, start to finish |
| Interest charged on | Only what you have actually drawn | The whole amount from day one |
The payment row hides the risk people miss. The CFPB warns that unlike a typical installment loan, the portion of a minimum HELOC payment that goes toward principal may not be enough to repay the principal by the end of the term. A line can be serviced faithfully for a decade and still owe close to the original balance.
The use of funds decides it
The CFPB puts it directly: consider a closed-end second mortgage instead of a line if you need a set amount for a specific purpose. That one test tells you more than any rate comparison.
- One project with a signed contract price. A closed-end loan. You know the number, you want the payment fixed, and you have no reason to keep a line open afterwards.
- A renovation in stages, or tuition across several years. A line. Interest accrues only on what has been drawn, so an undrawn limit costs little beyond any annual fee.
- Consolidating existing debt. Closed-end, almost always, because a line converts fixed debt into revolving debt secured by the house. The discipline that fixed payments impose is part of what you are buying.
- A reserve you hope not to use. A line, with eyes open. It is cheap to hold and it is secured by your home, which is a different kind of standby facility from a credit card.
What the lender must hand you, and what to do with it
The CFPB booklet a lender gives you at application is not marketing. It exists because federal law requires it, at 15 U.S.C. 1637a(e) and 12 CFR 1026.40(e). Alongside it the lender has to set out the payment terms and how the draw and repayment phases differ, everything it will charge you across the life of the account, what outside companies will charge on top, and how the variable rate works.
Those disclosures are the comparison. The CFPB’s own worksheet asks you to line up three offers on credit limit, index and its current value, the margin, adjustment frequency, rate cap and floor, length of plan, draw period, repayment period, appraisal fee and application fee. Anything that does not fill in those boxes is not an offer yet.
An advertised rate is a marketing input. The disclosure is the product. The gap between a homeowner inquiring and a loan actually funding is mostly made of things sitting in that paperwork, and the ones that most often end it are covered in our notes on how much you can actually borrow and what the fees do to the quote.
The three days after signing
Where the property is your principal dwelling, the Truth in Lending Act gives you three days from the day the account is opened to cancel the line, for any reason. You tell the lender in writing. The CFPB is specific about what follows: the lender must then cancel its security interest in your home and return all fees paid to open the account, including application and appraisal fees.
The FTC puts the deadline precisely: until midnight of the third business day, and business days include Saturdays but not Sundays or legal public holidays. Put the deadline on your calendar the day you sign.
Both products put the house up as collateral. That is the sentence that should govern the decision, and it applies equally to the line and the loan.
HELOC or home equity loan: common questions
Which one has the lower rate?
A line often starts lower because it is variable and can move, while a closed-end loan is usually fixed and prices that certainty in. Comparing the two on the opening rate compares a number that can change against one that cannot. What a variable rate can actually do to a payment is worked through in our note on prime and margin.
Can I have both?
Sometimes, subject to combined loan-to-value limits and the lender’s assessment of your ability to repay everything at once. In practice the second product competes with the first for the same equity, so the real question is how much room you have in total, not how many accounts you can open.
What happens when the draw period ends?
One of three things, and the plan says which. It may be renewable, it may call for payment in full of the outstanding balance, or it may convert to a repayment period over a fixed term. Find that answer before signing, because a balloon at the end of a ten-year draw is a very different obligation from an amortizing second phase.
Is the interest tax deductible?
It depends on how the money is used and on your own tax position, and the rules changed materially in 2018. This is a question for IRS guidance and a tax professional on your specific return, not for a lender’s marketing material. Do not let an assumed deduction be the reason a payment looks affordable.
Sources
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Every figure in this article traces to a government record or to a named independent, non-commercial research body. We do not cite affiliate comparison sites for data.
- CFPB Home equity lines of credit (HELOC)
- CFPB Closing costs and fees
- Federal Reserve Selected Interest Rates (H.15)
- FTC Mortgage shopping tips
- FDIC Consumer Resource Center