Home Equity Loan vs. HELOC 2026: Rate Structure, Draw Period, and When to Recommend Each

Both products tap home equity, but their structure differs fundamentally. A home equity loan delivers a lump sum at a fixed rate for a fixed term. A HELOC is a revolving line of credit with a variable rate tied to Prime. Matching the right product to the borrower's need is an MLO's job.

Rate and Payment Structure

• ✦Home equity loan: fixed rate set at origination, fixed monthly payment, fixed term (typically 10 to 30 years)
• ✦HELOC: variable rate calculated as Prime plus a margin, with the margin typically ranging from 0 to 2 percentage points
• ✦HELOC minimum payment during the draw period is usually interest-only on the outstanding balance
• ✦Some HELOCs offer a fixed-rate advance option that converts a portion of the balance to a fixed-rate sub-loan
• ✦HELOC rate moves with every Fed rate change; home equity loan rate does not

CLTV Limits and Qualification

Most lenders cap combined loan-to-value at 80% to 85% for both products. Some lenders allow up to 90% CLTV for borrowers with FICO scores above 720, though these programs carry a higher rate. DTI requirements are similar to first mortgage underwriting, with most lenders targeting a back-end DTI under 43%. Both products underwrite to the full repayment payment, not just the interest-only phase.

When to Recommend Each

• ✦Home equity loan: borrower needs a fixed sum for a defined, one-time purpose such as a home renovation or debt consolidation, and wants predictable payments
• ✦HELOC: borrower needs flexible access over time, such as ongoing contractor draws, business capital, or a low-cost standby credit facility
• ✦HELOC as a bridge: useful before a rate-and-term refinance or a sale when the borrower needs short-term liquidity without touching the first mortgage
• ✦Home equity loan for long-term stability: borrower on a fixed income who cannot absorb rate volatility should avoid a variable HELOC