Once the money is out, what actually differs between a home equity loan and a HELOC?

Summary

A home equity loan pays you one amount up front, and a HELOC is a line you can draw on, repay and draw on again up to a limit. The bigger differences show up later. A HELOC lender can freeze or cut the line if your home's value drops sharply, and payments often rise steeply when the draw period ends. A home equity loan can't be cut back after closing, and the lender has to give you a Loan Estimate and assess your ability to repay before you get there.

Side by side

	Home equity loan	HELOC
How the money arrives	"a lump sum payment"	Draws "multiple times from an available maximum amount"
Rate	"may have a fixed or adjustable interest rate"	"usually have adjustable interest rates"
Can the lender shrink it later?	No, the full amount is paid out at closing	Yes, in the situations listed in 12 CFR 1026.40(f)(3)(vi)
Payment after year 10	Follows the schedule set at closing	"often significantly higher once you enter repayment"
Ability-to-repay rule (12 CFR 1026.43)	Applies	Excluded
Loan Estimate within three business days	Required	Not part of that rule, which covers closed-end credit

The quoted cells come from the CFPB's pages on the two products. If you already have a mortgage, the CFPB notes that either one would be a second mortgage.

A line of credit can shrink

Regulation Z bars a HELOC lender from changing the terms of a plan, with exceptions. One of them lets the lender stop new draws or lower the limit while "the value of the dwelling that secures the plan declines significantly below the dwelling's appraised value," and a material change in your finances can have the same effect. The full list is in the HELOC explainer. A home equity loan has nothing comparable, because there is no unused balance left to take away.

Year 11 on a HELOC

FourLeaf Federal Credit Union and PenFed both run a 10-year draw period followed by 20 years of principal and interest. Third Federal also uses a 10-year draw, but inside a 30-year total. When the draw period ends you can't borrow any more, and the CFPB says that "in some cases, you may have to pay back the whole amount you borrowed as soon as the repayment period begins."

On the loan side, Rocket Mortgage describes the whole life of its product in one line: "You'll make monthly payments at a fixed interest rate until the loan is paid off." Regions offers 10, 15 or 20 years on amounts from $10,000 to $500,000.

The flexibility also varies more than the label suggests. Third Federal's HELOC has "No minimum balance or initial draw required," while FourLeaf's advertised standard rate assumes a $25,000 draw at opening.

Sources

Written by Kaz (pen name). Figures are copied from providers' published pages on the dates shown. We have not used these products. Corrections: contact form.