HELOC vs home equity loan
By Jude Wallis
A HELOC is a revolving line secured by home equity. A home equity loan advances a lump sum and then amortises it. On a $50,000 drawn HELOC at 8 percent, the interest-only charge is $333.33 a month.
| HELOC | Home equity loan | |
|---|---|---|
| How the money arrives | As draws against a line, only when needed. | As one advance at closing. |
| First-phase payment on \$50,000 at 8 percent | Interest only: $333.33 a month, $4,000 a year, if the balance stays drawn. | An amortising payment that returns principal from the first month. That identity is a loan payment, not this interest-only sheet. |
| If the drawn balance is \$20,000 | Interest only falls to $133.33 a month and $1,600 a year at the same 8 percent. | The original lump sum does not shrink just because less was needed. The whole advance is still being repaid. |
| Rate | Usually variable: index plus margin, so the charge can move with no new draw. | Often fixed for the term, so the payment is known if the loan is ordinary amortising credit. |
| Unused room | Can still be available during the draw period, subject to the agreement. | There is no unused room. The advance already happened. |
| When repayment changes the job | New draws stop and principal joins the payment, which is often a much larger bill. | Repayment was the job from closing. |
On this page
The same house, two ways to borrow against the residual
Both products are secured by home equity, which is value minus what is still owed. The home equity against LTV comparison is that residual written as dollars and as a ratio.
The products disagree about how the money arrives. A HELOC is a line. A home equity loan is a lump sum. How a HELOC works keeps the revolving structure in view. The HELOC calculator prices one interest-only month on the drawn balance.
The first monthly figure is not the same object
On a $50,000 drawn HELOC at 8 percent, annual interest is $4,000 and one twelfth is $333.33. On a $20,000 drawn balance the same rate produces $133.33 a month. Those figures do not return principal.
A home equity loan of $50,000 is already fully advanced. Its payment is an amortising loan payment once the term is known. The loan payment calculator is that identity. Do not read the HELOC interest-only charge as if it were that later bill.
Principal is what is still owed. On the HELOC it changes when you draw or repay. On the lump-sum loan it starts at the advance and then falls on the schedule. This is educational material, not financial advice.
Worked examples
Interest only on a \$50,000 HELOC draw
A HELOC has $50,000 outstanding at an 8 percent annual rate. What are the interest-only monthly and annual charges?
- Annual interest is , so $4,000.
- One twelfth is $333.33 a month after rounding.
The interest-only charge is $333.33 a month and $4,000 a year on the $50,000 drawn balance.
The same rate on a \$20,000 draw
The annual rate is still 8 percent, or 0.08, but the drawn HELOC balance is $20,000. What are the interest-only charges?
- Annual interest is , so $1,600.
- One twelfth is $133.33 a month after rounding.
The interest-only charge is $133.33 a month and $1,600 a year on a $20,000 drawn balance.
Common questions
Can I use a HELOC like a home equity loan?
You can draw a large amount at once, but the product is still a line. The rate can move, unused room may remain, and repayment can change the required payment later.
Which payment should I compare?
Compare the HELOC interest-only charge with the lump-sum loan payment only after you name the phase. A draw-period charge and an amortising payment are different objects.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.