The short version
Both are second mortgages. Both sit behind your existing loan and leave it alone. A HELOC is a line of credit: you draw what you need, when you need it, and the rate floats. A home equity loan is a lump sum at a fixed rate with a fixed payment.
My rule of thumb: if you know the exact number and you want it paid off on a schedule, take the fixed loan. If the cost is uncertain or spread out over time, like a remodel, take the line. And if your first mortgage has a rate you'd never get again, either one usually beats a cash-out refinance.
How does a HELOC actually work?
Think of it as a credit card secured by your house, with a much lower rate and a much bigger limit. The lender approves a maximum line. You pull from it as needed and pay interest only on what you've drawn.
Most HELOCs have two phases. The draw period, commonly 10 years, is when you can borrow, pay down and borrow again, and the minimum payment is often interest only. Then the repayment period kicks in, often 15 or 20 years, and the balance gets paid off with principal and interest. That switch is where people get surprised. The payment can jump a lot.
The rate is variable, usually tied to the prime rate plus a margin. When the Fed moves, your payment moves. To put a number on it: $100,000 drawn at a rate around 8.5% is roughly $708 a month interest only. That rate is for illustration. Current pricing depends on your credit, your equity and the lender, so verify for your scenario.
How is a home equity loan different?
One check, one rate, one payment. You borrow a set amount at closing and pay it back over a fixed term, typically anywhere from 10 to 30 years. Nothing floats.
You pay for that certainty two ways. The rate is often a bit higher than a HELOC's starting rate, and you're paying principal from day one. That same $100,000 on a 20-year fixed around 8.75% runs about $885 a month. Higher than the interest-only HELOC payment, but every one of those payments is actually shrinking the debt.
I like the fixed loan for people who know themselves. If an open credit line with $150,000 available is going to turn into a boat, be honest about that. The lump sum has a built-in finish line.
How much can I borrow against my house?
Lenders look at combined loan-to-value: your first mortgage plus the new second, divided by what the house is worth. Many cap that at 80%. Some go to 85% or 90% for strong credit, with a higher rate to match.
Here's how it pencils out. Say your place in Bennett Valley is worth $850,000 and you owe $380,000 on the first. At 80% combined, total loans can reach $680,000. Subtract the $380,000 and you've got up to $300,000 of borrowing room. Whether you qualify for the payment on that is a separate question, and it comes down to income and debts like any other mortgage.
- Credit score: the best HELOC pricing generally starts around 700 and up. Options exist below that, but they thin out fast.
- Income: fully documented with most banks and credit unions. Self-employed borrowers have bank-statement second mortgages available through some lenders.
- Property type: primary residences get the best terms. Second homes and rentals are doable with lower limits and higher rates.
- Value: some lenders use an automated valuation instead of a full appraisal on smaller lines, which saves time and money.
Should I just do a cash-out refinance instead?
Depends almost entirely on the rate on your current mortgage.
If you locked in at 3% in 2021, a cash-out refinance means replacing that whole balance at today's rate just to get at some equity. On a $380,000 balance, that can cost you hundreds a month before you've borrowed a new dollar. A second mortgage carries a higher rate, but only on the new money. The blended cost is usually far lower.
It flips when your first mortgage rate is already at or above the current market, or when you need a large amount relative to what you owe. Then one new loan at a first-mortgage rate can beat a first plus a pricey second. I run both side by side for clients, because the answer isn't always the obvious one.
What do Sonoma County homeowners use these for?
Around here, the same handful of reasons come up again and again. Some are a better fit for a line, some for a lump sum.
- Remodels and additions: HELOC. Contractor bids in this county have a way of growing, and you only pay interest on what you've drawn so far.
- A new roof, solar or a septic replacement with a firm quote: home equity loan. Known cost, fixed payoff.
- Building an ADU: often a HELOC during construction, sometimes refinanced into something fixed once it's done and rented.
- Paying off high-interest credit cards: fixed loan, and then put the cards in a drawer. Rolling card debt into your house only works if the cards stay paid off.
- Down payment on a rental or a next home: a HELOC on your current place is one of the cleaner ways to do it. Set it up before you list or go shopping, not during.
- Emergency reserve: an open HELOC with a zero balance costs little or nothing to hold with many lenders. Check for annual fees and early-closure fees first.
What are the risks nobody mentions at the bank branch?
Your house is the collateral. Miss payments on a second mortgage and foreclosure is on the table, same as with the first. That's the big one, and it's why I push back when someone wants to fund a vacation this way.
Variable rates cut both ways. Plenty of people opened HELOCs when prime was low and watched their payment nearly double over a couple of years. If you're carrying a large balance for a long time, ask whether the lender lets you lock portions of the line at a fixed rate. Many do.
And a line isn't guaranteed to stay open. Lenders froze and cut HELOCs in 2008 and again in 2020 when values got shaky. If you're counting on that line for a specific project, don't assume it'll be there untouched three years from now.
One tax note. Interest on home equity debt is generally only deductible when the money is used to buy, build or substantially improve the home that secures it, and there are limits. Paying off a car doesn't count. Ask your CPA before you plan around a write-off.