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Much of the difference between a home equity loan and HELOC comes in the form of how funds are given out, accessed and repaid. With a home equity loan, you are given the full amount as a lump sum, similar to a traditional loan, and repay the balance through monthly payments over a set amount of time. The option will always have a fixed rate allowing for consistent monthly payments.

When you open a home equity line of credit, you have access to a set amount of funds that you can borrow as needed. The great part about a HELOC is the flexibility. You may open a HELOC and never use any of the funds available to you, or you can borrow up to the limit. Either way, you only pay on what you borrow. The interest rate on a HELOC is usually variable, meaning your monthly payment will increase or decrease as rates fluctuate. However, you have the flexibility to pay as little as interest-only payments for the first 10 years.^3,4

Home equity loans are most useful in the following situations:

• You have a project in mind. If you have a distinct spending need, being able to borrow a lump sum at a fixed interest rate is helpful.
• You want a fixed interest rate. If variable interest makes you antsy, a home equity loan offers predictability with a set term, interest rate and monthly payment.
• You want to consolidate debt. If you’re looking to combine several monthly debt payments into one payment at a fixed rate, a home equity loan can allow you to do this.

HELOCs are better suited to the following uses:

• You’re doing a home improvement project in stages. If you’ll need a large sum of money, but you won’t need it all at once—such as a home renovation that happens in pieces—a HELOC may be the better choice since you can borrow the money in chunks.
• You aren’t sure how much money you need. If you have a cash need—or the potential for a cash need—but you aren’t sure of the total amount, a HELOC gives you more flexibility.
• You need a safety net. You can open a HELOC as an extra emergency fund in case you find yourself in a tight spot—because once you’re in the tight spot, borrowing money isn’t always easy.
• You're looking to borrow money at a lower monthly payment. While HELOCs have variable rates that can fluctuate over time, the rates may often be lower than other forms of borrowing, like credit cards or personal loans. Plus, you have the flexibility to make payments as low as interest-only.^3,4

You don’t have to tap your home equity just because it’s there—and if you do, make sure you do it wisely. Avoid the following mistakes:

• Using it for everyday expenses.
• Being casual about missing payments. Your home is your collateral for a home equity loan or HELOC. That means if you default on this loan, you could lose your house.
• Borrowing heavily before a move. If you’re not going to be in the home for several years, borrowing a hefty amount of your home equity can put you in a bad position if home values go south. You could end up owing more on the home than it’s worth, which makes it very difficult to sell.