While both HELOCs and home equity loans allow you to borrow against your home’s equity, they function quite differently. A HELOC provides a revolving line of credit with a variable interest rate, similar to a credit card. You can draw funds as needed during the draw period (typically 5-10 years), and many only require interest payments during this time. In contrast, a home equity loan provides a one-time lump sum with a fixed interest rate and immediate monthly payments of both principal and interest. HELOCs offer greater flexibility for ongoing projects or uncertain expenses, while home equity loans provide payment predictability and are better suited for single large expenses where you know the exact amount needed. The choice between these options should depend on your specific needs—whether you prefer the flexibility of drawing funds as needed with potentially varying payments (HELOC) or the security of fixed payments and interest rates (home equity loan).

HELOC interest rates are typically variable, based on a benchmark index (such as the Prime Rate) plus a margin determined by your credit profile and lender. For example, if the Prime Rate is 5.5% and your margin is 1%, your HELOC rate would be 6.5%. When the benchmark index changes, your HELOC rate adjusts accordingly, usually with minimal delay. Most HELOCs have both periodic caps (limiting how much the rate can increase in a given adjustment period) and lifetime caps (setting the maximum possible rate over the life of the line). Some lenders now offer “hybrid” HELOCs that allow you to lock in fixed rates on all or portions of your balance. Interest accrues only on the amount borrowed, not the entire credit line, and is calculated daily based on the outstanding balance. This variable structure means your payments can fluctuate even if your balance remains constant—an important consideration for budgeting. Generally, HELOC rates start lower than home equity loan rates but may increase over time, potentially resulting in higher costs long-term.

When your HELOC draw period ends, several significant changes occur. First, you can no longer borrow from the credit line—any undrawn funds become unavailable. Second, your payment structure changes from interest-only to fully amortizing payments that include both principal and interest. This transition typically causes a substantial payment increase—often called “payment shock.” For example, if you had a $50,000 HELOC balance with a 4% interest rate, your monthly interest-only payment during the draw period would be about $167. However, when entering a 15-year repayment period, your monthly payment would jump to approximately $370. Your options at this transition point include: paying as scheduled according to the new amortization schedule, refinancing into a new HELOC (if you qualify), converting the balance to a fixed-rate loan (offered by some lenders), or paying off the balance with other funds. Planning for this transition is crucial, especially if you’re carrying a significant balance as the draw period concludes.

HELOCs impact your credit score in several ways. When you apply, the lender conducts a hard inquiry, which typically causes a temporary 5-10 point decrease in your score. Once established, the HELOC is reported as a revolving account, similar to a credit card, with both your credit limit and current balance factored into your credit utilization ratio. Maintaining a high utilization (borrowing most or all of your available credit) can significantly lower your score, while keeping utilization under 30% is generally beneficial. On-time payments help build positive payment history, which comprises about 35% of your FICO score. HELOCs also affect your debt-to-income ratio, which isn’t directly part of your credit score but is important for future credit applications. The long-term credit impact varies depending on how you use the HELOC: responsible management with low utilization and perfect payment history can actually improve your score over time, while maxing out your line or missing payments will have negative consequences. Unlike credit cards, closed HELOCs with zero balances typically remain on your credit report for 7-10 years.

HELOCs typically involve several types of fees that affect the total cost of borrowing. Upfront costs often include application fees ($75-$100), appraisal fees ($300-$400), title search fees ($100-$250), and origination fees (sometimes calculated as percentage points of the credit line). Some lenders charge annual maintenance fees ($50-$100) to keep the line open, even if you don’t use it. Transaction fees may apply each time you draw from the line, though these are less common. Early termination fees ranging from $300-$500 are charged if you close the HELOC within a specified period, usually 3-5 years. Some lenders offer “no-fee” HELOCs that waive upfront costs in exchange for a slightly higher interest rate or the requirement that you maintain the account for a minimum period. Inactivity fees might apply if you don’t use your HELOC for an extended period. The total fee structure varies significantly between lenders, making it important to request a complete fee disclosure before committing. When comparing options, calculate the Annual Percentage Rate (APR), which incorporates both interest rates and fees, to determine the true cost of each HELOC offer.