HELOC vs. Home Equity Loan: What’s the Difference?

home equity options

There are two common ways to borrow against your home’s equity: a home equity loan and a home equity line of credit (HELOC). Both allow you to use your home’s value to access funds, but how each works is very different.

What Both Options Have in Common

A home equity loan and a HELOC both:

  • Use your home as collateral

  • Allow you to borrow against available equity

  • Function as a second mortgage (in most cases)

  • Typically allow borrowing up to a set maximum, such as $300,000

  • Qualifying usually depends on how much equity you have and your overall financial profile

From there, the structure of each option begins to differ.

How a Home Equity Loan Works

Home equity loans are the more straightforward option. Borrowers receive a lump sum of money upfront and pay it off in installments like they would other installment loans. At Ouachita Valley Federal Credit Union:

  • Loan amounts are available up to $300,000

  • They are fixed-rate loans with terms ranging from 1 to 15 years

Because the rate is fixed:

  • Your interest rate does not change

  • Your monthly principal and interest payment remains consistent

  • You have a clear repayment schedule

This structure offers predictability. You know exactly how much you are borrowing, what your payment will be, and when the loan will be paid off.

How a HELOC Works

Instead of receiving one lump sum, HELOCs provide a line of credit that you can draw from as needed during the draw period. You only make payments based on the amount you have drawn, not the full credit limit. The HELOC enters the repayment phase once the draw period ends, during which you’ll need to pay principal and interest according to the loan terms.

At Ouachita Valley FCU:

  • HELOCs are available up to $300,000

  • The draw period is 5 years

  • The rate is variable

  • There is a modest minimum payment required during the draw period based on the balance owed (1% of the balance or $100, whichever is greater)

  • During the 5-year draw period, you can borrow, repay, and borrow again up to your approved credit limit

Because the rate is variable, your payment can change if market rates change.

Fixed vs. Flexible: The Core Difference

A home equity loan offers:

  • A lump sum loan upfront

  • Fixed interest rate

  • Fixed monthly payments

  • A defined payoff timeline

A HELOC offers:

  • Functionality similar to a credit card, with an approved credit limit

  • Flexible access to funds

  • Repayment tied to your current balance

  • A variable interest rate

With a home equity loan, you receive the full amount upfront and begin paying interest on that entire loan balance right away (which decreases over time as you repay principal).

With a HELOC, you only pay interest on the amount you actually use, not the full amount you were approved for. For example, if you are approved for $150,000 but only draw $20,000, you repay that $20,000 plus interest on it, not the unused portion of the credit line.

One-Time Project vs. Ongoing Expenses

Although these home equity products are sometimes framed as interchangeable borrowing options, like choosing between two similar credit cards, they do have specific use cases. Which is best depends on what you’re trying to accomplish.

A home equity loan may make more sense if:

  • You know exactly how much money you need

  • You are funding a one-time project or purchase

A HELOC may be more appropriate if:

  • Costs will unfold over time

  • You need access to funds in stages

  • You want borrowing flexibility within a set limit

For example, a phased home improvement project may benefit from a line of credit, while debt consolidation, a clearly priced renovation, or a recreational vehicle purchase may align better with a lump-sum loan.

Does a HELOC or Home Equity Loan Better Fit Your Situation?

Answer the following questions before deciding:

  • Do you know the exact amount you need?

  • Do you prefer a fixed monthly payment?

  • Are you comfortable with variable rates?

  • Will you need ongoing access to funds during the next several years?

The right choice depends on how you plan to use the funds and how you want your payments structured.

If you’re evaluating home equity options in Monroe or Ouachita Parish, you can speak with a local lending professional to review how a home equity loan or HELOC would work in your situation.

Call Ouachita Valley Federal Credit Union at 318.387.4592 to discuss your options and determine which structure aligns with your goals.

Brenda McMullen