If you’ve built up equity in your home, you’re sitting on a powerful financial tool. But when it’s time to borrow against that equity, you’ll face a choice: a home equity loan or a home equity line of credit (HELOC).
Both can fund big expenses—like renovations, tuition, or debt consolidation—but the real question is: which one saves you more money on fees and interest over time? Let’s break down how each works, what they cost, and when one clearly beats the other.
What Is a Home Equity Loan?
A home equity loan is essentially a second mortgage. You borrow a lump sum of cash upfront, with a fixed interest rate and predictable monthly payments.
Key features:
- Lump-sum payout
- Fixed interest rate
- Set repayment term (usually 5–30 years)
- Predictable payments—no surprises
💡 Example: If you have $100,000 in home equity, you might borrow $40,000 at 7% for 10 years. You’ll pay the same amount each month until it’s paid off—perfect if you like stability.
Typical fees:
- Origination fees (1%–5% of loan amount)
- Appraisal fee ($300–$700)
- Closing costs (can total 2%–5%)
👉 Average cost: According to Bankrate, home equity loan closing costs typically range from $2,000–$5,000 depending on your location and loan size.
What Is a HELOC?
A Home Equity Line of Credit (HELOC) works more like a credit card secured by your home. You get access to a revolving credit line—borrow what you need, when you need it—up to a set limit.
Key features:
- Flexible borrowing during “draw period” (usually 5–10 years)
- Variable interest rate (though some now offer fixed-rate options)
- Pay interest only on what you use
- Reusable line—repay and borrow again
💡 Example: Say you open a $50,000 HELOC but only withdraw $10,000 for a kitchen upgrade. You’ll only pay interest on that $10,000—giving you room to borrow more later if needed.
Typical fees:
- Annual fee ($50–$100)
- Application fee (sometimes waived)
- Appraisal fee ($300–$700)
- Closing costs (0%–2%)
- Early termination fee (if you close the line early)
👉 Average cost: Many banks waive HELOC closing costs, but expect $500–$1,000 in fees over time—usually less than a home equity loan.
Comparing Fees and Interest: Which Saves More?
Here’s how these two stack up when it comes to total cost of borrowing.
| Cost Factor | Home Equity Loan | HELOC |
|---|---|---|
| Upfront Fees | Higher (2%–5%) | Lower (0%–2%) |
| Interest Rate Type | Fixed | Variable (can rise or fall) |
| Monthly Payments | Fixed | Fluctuate with rate changes |
| Flexibility | Lump sum | Borrow as needed |
| Best For | One-time large expense | Ongoing or unpredictable costs |
Verdict:
- If you want stability and long-term budgeting certainty, the home equity loan wins—even if fees are higher upfront.
- If you value flexibility and potentially lower initial costs, a HELOC often saves more in the short term, especially if you don’t borrow the full amount.
💬 Pro tip: Compare the APR (Annual Percentage Rate) for both options—it includes interest and fees, giving you the true cost of borrowing.
Real-World Cost Comparison
Let’s say you need $40,000 for home improvements.
| Loan Type | Interest Rate | Fees | Term | Total Interest + Fees |
|---|---|---|---|---|
| Home Equity Loan | 7.0% fixed | $2,000 | 10 years | ~$15,500 total cost |
| HELOC | 6.5% variable | $500 | 10 years | ~$14,000 (if rates stay steady) |
If rates rise by 2%, that HELOC could end up costing more than the loan—a real risk in today’s fluctuating economy.
Bottom line: A HELOC saves more if rates stay low and you borrow selectively. But if you prefer predictability, the home equity loan may be worth the upfront cost.
Which Is Right for You?
Ask yourself these questions:
- Do you need all the money at once? → Go with a home equity loan.
- Are you funding multiple projects over time? → A HELOC gives you flexibility.
- Worried about rising rates? → Fixed-rate home equity loans offer peace of mind.
- Want to minimize fees? → HELOCs usually win on that front.
- Need a tax deduction? → Interest may be deductible for both if used for home improvements (per IRS guidelines).
📚 Tip: Always check your lender’s fine print—some HELOCs have minimum draw requirements or early closure fees that eat into savings.
The Smartest Move: Compare Offers Side by Side
Before signing anything, get quotes from at least three lenders. Use tools from NerdWallet or Bankrate to compare APRs, closing costs, and rate caps.
You can also ask if they’ll:
- Waive appraisal or origination fees
- Offer a rate lock on HELOC draws
- Bundle with your existing mortgage for discounts
A few minutes of comparison shopping can save you thousands.
The Takeaway
When deciding between a home equity loan and a HELOC, it’s not just about interest—it’s about total cost and flexibility.
- Go with a home equity loan if you want stable payments and long-term predictability.
- Choose a HELOC if you value flexibility and expect to borrow in smaller chunks.
Either way, understanding the fees up front is what keeps your home equity working for you—not against you.
Have you used your home equity before? Share your experience or questions in the comments below!
