Home equity loan vs. HELOC: Which is safer when interest rates are high?

Equity is the value you have built up in your home after years of making consistent payments. You can access your home equity for funds you can use for a variety of expenses, both planned and unexpected, at a rate considerably lower than most credit cards.¹ 

A home equity loan generally provides a lump-sum with structured repayment, so your payments may be more predictable.  

A HELOC is a line of credit allows you to draw what you need when you need it. Its rates are often variable, so your monthly payments could go up when rates rise. However, with a HELOC from Rate, you can select repayment options with either fixed² or variable³ rates.  

Are you ready to explore how a Rate HELOC could work for you? Talk with a Loan Officer for more information when you begin your HELOC application! 

How each product works

Home equity loan

A home equity loan generally comes to you as a lump-sum at closing. You repay it on a set schedule, usually with a fixed rate and equal monthly payments. Because the amount and schedule are set up front, you can plan around the payment. 

HELOC

A HELOC allows you to borrow against your equity as needed up to an approved limit. A Rate HELOC includes a draw period, during which you can borrow what you need and often make interest-only payments. A repayment period follows, during which payments typically include both principal and interest.  

Both of these are second-lien loan options, which means they are designed to be paid back alongside your original mortgage.  

They are different from a cash-out refinance, which replaces your existing mortgage with a larger one. A cash-out refinance returns the difference to you in cash that you can use for any expenses. 

They are also different from a reverse mortgage, which has different eligibility rules and repayment terms. A reverse mortgage allows you to borrow against the value built up in your home without having to make payments. 

Keep in mind that both home equity loans and HELOCs are secured by your home, which could put the home at risk of foreclosure if you miss payments. 

Home equity loan vs. HELOC at a glance

What 'safe' means when rates are high

Safety when it comes to borrowing against the value you have built up in your home is about risk you can manage. Here are four risks that matter most. 

1. Payment shock: If your HELOC rate is variable, your payment could go up when rates rise. Interest-only payments can also jump when the draw period ends and principal repayment begins.
2. Locking in a high rate: A fixed rate with a home equity loan or HELOC protects you if rates climb. It can also lock you into a rate that looks expensive if rates later fall. Ask about refinancing options and any costs related to refinancing.
3. Borrowing too much: A HELOC is easy to draw on when you need extra cash. Interest-only payments can make a growing balance feel affordable until repayment begins.
4. Your home is the collateral: With either product, there is a potential to lose your home if you cannot keep up with payments.

When a home equity loan may fit

Here's when a home equity loan may be an option. 

• You need a known amount for a single purpose, such as a specific renovation.
• You want one payment amount for the life of the loan.
• Your budget has little room for a payment increase.

When a HELOC may fit

Here's when a HELOC may be an option. 

• Your costs will come in stages or are hard to predict.
• You are comfortable with a payment that could change.
• You plan to repay the balance quickly, rather than carry it for years.

If you choose a HELOC, it's smart to estimate what your payment could be once principal is included. 

How to reduce risk with either product

• Borrow only what you need. A smaller balance means a smaller payment no matter what the rate is.
• Stress-test your budget. Calculate your payment at a rate meaningfully higher than today's. If that payment would strain you, consider borrowing a smaller amount or a different product.

• Keep an emergency fund. Do not use home equity to replace savings.
• Compare the full cost. Review the APR, origination fees, closing costs and any annual or early closure fees on the loan disclosure documents.
• Ask about terms. Ask whether the rate has a cap, how often it can change and whether you can convert part or all of the balance to a fixed rate.
• Check eligibility. Lenders consider credit score, debt-to-income (DTI) ratio, occupancy, property type and lien position. These affect whether you could qualify, your rate and the maximum amount you could borrow.

How Rate's HELOC works

If a HELOC fits your plan, here is how a Rate HELOC works. Rate's digital application takes about five minutes to complete, and you can get your funds in as little as five days.⁴ 

Rate's HELOC allows additional draws as you make interest-only payments during the draw period. Monthly payments with a fixed-rate option will stay the same once principal and interest are included after the draw period. Payments could increase if rates rise during the repayment period.  

Eligibility and terms depend on factors such as property type, loan-to-value (LTV) ratio, credit score, DTI ratio, occupancy and lien position.  

Property insurance is required, and flood insurance may be required in certain areas. Rate's online application will connect you with a Loan Officer who can answer questions and help you with the process. 

You can use Rate's HELOC calculator to estimate payments at different rates. 

What are the next steps to a HELOC or HELOAN with Rate?

Both of these loans come with a certain level of risk. So, decide how much you need, test the payment at a higher rate and compare written offers. To explore a line of credit, see Rate's HELOC page to learn about eligibility and next steps.