If you have owned your home for more than a few years, there is a decent chance you are sitting on a small fortune in equity you barely think about. According to the Federal Reserve, U.S. homeowners collectively held more than $35 trillion in equity by early 2026 — and the most common ways to actually tap that wealth without selling are two close cousins called a home equity loan and a home equity line of credit, or HELOC. They sound interchangeable, lenders sometimes pitch them as if they were, and the federal disclosure forms even use overlapping language. But they work in fundamentally different ways, and choosing the wrong one for your situation can quietly cost you thousands of dollars over the life of the borrowing. This is a plain-English walkthrough of how each one actually works, what they cost in May 2026, and how to think about the choice.
What “Home Equity” Actually Means
Equity is the slice of your house you truly own — the appraised value minus what you still owe on your mortgage. If your home is worth $400,000 and your mortgage balance is $220,000, you have $180,000 of equity. Lenders will typically let you borrow against some portion of that equity, but almost never all of it. Most banks and credit unions cap total borrowing at 80% to 85% of the home’s value, including your existing mortgage. That cap is called the combined loan-to-value ratio, or CLTV. On the $400,000 example, an 85% CLTV means total combined borrowing of $340,000. Subtract the $220,000 mortgage and you are left with $120,000 of borrowable equity. Some lenders go to 90% for highly qualified borrowers, and a small number go higher, but the cost goes up the closer to the ceiling you push.
Both products use your house as collateral. That is the defining feature, and the reason rates are dramatically lower than on credit cards or personal loans — and also the reason missing payments can put your home at risk. The IRS allows interest on either product to be tax-deductible only when the funds are used to “buy, build, or substantially improve” the home that secures the loan, per IRS Publication 936. Using a HELOC to pay off credit cards is allowed, but the interest is not deductible.
Home Equity Loans: The Predictable Lump Sum
A home equity loan, sometimes called a second mortgage, is the simpler of the two. You apply, the lender approves you for a specific dollar amount, and you receive that amount as a single lump-sum deposit at closing. From day one, you start making fixed monthly payments of principal and interest at a fixed interest rate for a fixed term — typically five to 30 years, with 10 and 15 years being the most common choices.
The defining feature is predictability. As Bankrate’s home equity comparison explains, your monthly payment never changes. If you borrow $50,000 over 15 years at the May 2026 national average of around 7.53%, your monthly payment is roughly $465, and it stays $465 for 180 months. You know exactly what you will pay every month from now until the loan is paid off, regardless of what happens to interest rates, the economy, or your home’s value.
The trade-off is that you pay interest on the entire balance from day one. If you do not actually need all $50,000 today — if you are remodeling a kitchen over the course of a year, for example — you are still paying interest on every dollar you borrowed but have not yet spent. That is the friction point that pushes many homeowners toward the second option.
HELOCs: The Credit Card Backed by Your House
A home equity line of credit works less like a traditional loan and more like a credit card. The lender approves you for a maximum credit limit — say $50,000 — and then you draw against it as you need it, when you need it. If you draw $8,000 to fix a roof in June and another $12,000 to redo a bathroom in September, you owe interest on exactly $20,000, not the full $50,000 limit. Repay some of that balance and the credit becomes available to borrow again, exactly the way a credit card revolves.
HELOCs have two distinct phases. The first is the draw period, which is typically 10 years (though some lenders offer five or seven), per Bankrate’s HELOC draw period guide. During the draw period, you can borrow and re-borrow up to your limit, and the minimum monthly payment is usually interest-only. That keeps the carrying cost low — but it also means you are not building any principal paydown, so the full balance is still owed when the draw period ends.
The second phase is the repayment period, which is typically 10 to 20 years. Once the draw period ends, the line closes — you cannot take out any more money — and your minimum payment shifts to include both principal and interest. This is the payment-shock moment that catches a lot of HELOC borrowers off guard: many find their monthly payment more than doubles overnight when the draw period ends and amortization kicks in. If you borrowed heavily late in the draw period, the new payment can be jarring.
The other thing to know is that HELOC rates are almost always variable. They are typically priced as the U.S. prime rate plus a margin set by the lender, so when the Federal Reserve raises or lowers rates, your HELOC payment moves with it. As of May 2026, Bankrate reports the national average HELOC rate is around 7.50%, only slightly below the average home equity loan rate of 7.53%. A handful of lenders offer fixed-rate conversion options that let you lock part of your balance into a fixed rate, which can be a useful hedge if you are worried about future rate increases.
The Cost Comparison That Matters
In May 2026, the two products are priced almost identically on a headline-rate basis. According to Experian’s 2026 rate comparison, the gap between the average HELOC and the average home equity loan has been hovering at less than a quarter of a percentage point all year. That is unusually tight by historical standards — in 2022 and 2023, HELOCs were as much as a full point cheaper as banks fought for floating-rate balances. The compressed spread means the choice between the two should hinge less on rate-shopping and more on how you actually plan to use the money.
Closing costs run roughly 2% to 5% of the loan amount for either product, though many lenders waive or reduce them for HELOCs, especially if you commit to drawing a minimum amount within the first 90 days. Some HELOCs also carry annual fees of $50 to $100 and inactivity fees if you do not use the line. Read the disclosures.
How to Think About the Choice
The clearest decision rule is to match the product to the spending pattern. If you have one specific, knowable expense — a roof replacement quoted at $24,000, a debt consolidation of $35,000, a single major medical bill — a home equity loan usually wins. You know the amount, you want a fixed payment, and you do not want the temptation of a revolving line sitting open.
If you have a series of uncertain or staggered expenses — a multi-phase renovation, ongoing tuition payments, a small business cash-flow buffer, or “I might need it but I am not sure” — a HELOC usually wins. You pay interest only on what you actually use, and the line stays available without re-applying every time.
A third consideration is your view on interest rates. A fixed home equity loan locks you in at today’s 7.53% average. A HELOC at today’s 7.50% will move up or down with the prime rate over the next decade. If you believe rates are heading lower in the next year or two (the Federal Reserve’s projections currently lean that way), the HELOC’s variable rate works in your favor. If you believe rates could spike again, locking in fixed makes more sense.
One more thing worth thinking about: both products put your house on the line. That is a feature, not a bug — it is why the rate is so much lower than an unsecured personal loan or a credit card. But it also means you should never use either product for routine consumption, vacations, or anything you cannot reasonably promise yourself you will pay back. The Consumer Financial Protection Bureau publishes a useful primer called “What You Should Know About Home Equity Lines of Credit” that walks through the consumer protections required under the Truth in Lending Act, including the three-day right of rescission on most home equity products.
Used carefully, the equity sitting in your walls can be one of the cheapest sources of borrowing available to most American households. Used carelessly, it is the fastest way to turn a paid-down mortgage back into a 30-year obligation. Knowing exactly which product you are signing up for is half the battle.