How is a $100k home equity loan different from a $100k HELOC?

It feels great to see your home's value rise year over year. As the gap widens between what you owe on your home and what it's worth, you gain more equity.

A home equity loan or home equity line of credit (HELOC) lets you turn some of your home's value into cash. For example, you might be able to borrow $100,000 using your home as collateral. 

Is there a difference between a $100,000 home equity loan and a $100,000 HELOC? Here's what you should know before you borrow. 

Home equity loan basics

A home equity loan is a loan that's guaranteed by your home. In other words, your home is the collateral for the loan. 

Here's how a home equity loan typically works:

• You apply for a loan and the lender reviews your debt, home value, income, and credit scores.

• If approved, you get a lump sum of money that you can use any way you want.

• You repay the home equity loan in equal monthly installments, with interest.

• Home equity loan rates are usually fixed, so your rate and payment won't change over the life of the loan.

A home equity loan is a second mortgage. If you don’t repay your home equity loan, you could lose your home.  

Home equity line of credit (HELOC) explained

A HELOC is a line of credit that's guaranteed by your home. Here's how HELOCs work, in general:

• You apply for a HELOC, and the lender reviews your credit scores, debt, income, and home value to decide whether to approve you.

• If approved, you get access to a line of credit that you can withdraw from for a certain time. This is called the draw period, and it may last five to 10 years.

• Once the draw period ends, you enter repayment. You’ll make equal monthly payments until your HELOC is paid off.  

• HELOC interest rates may be fixed, but it's more common for them to be variable. 

A HELOC is a second mortgage, just like a home equity loan. If you don’t repay the loan, you could lose your home.

A second mortgage is second in line behind your first mortgage in the event that your home is sold. In that case, the money from the sale would go to the first mortgage lender. Then the second mortgage would be paid off. Anything beyond that would go to you, the seller.  

Are a $100k home equity loan and a $100k HELOC the same thing?

Yes and no. A $100,000 home equity loan and a $100,000 HELOC have some things in common, but there are differences, too. 

Here's how they're similar:

• Both a $100,000 home equity loan and a $100,000 HELOC are secured by your home. 

• You'll typically need good credit, low debt, and sufficient equity to get approved for either one. 

• Home equity loan rates and HELOC rates tend to be higher than regular mortgage rates but lower than credit card rates. 

• Lenders may charge origination fees, prepayment penalties, late fees, and closing costs for a $100,000 home equity loan or a $100,000 HELOC. 

• Interest on a home equity loan or HELOC could be tax-deductible if you use the money for home improvements or repairs. 

• You're not limited to home improvements—you could use a HELOC or home equity loan for anything. 

Now, here's how they're different:

• Home equity loans give you a lump sum of money to work with, while a HELOC may offer a lump sum or a revolving line of credit, kind of like a credit card.

• Home equity loans usually have fixed rates. HELOCs may have fixed or variable rates, or they may offer one type of rate initially, then switch to another at some point in the term. 

• Some HELOC lenders allow you to make interest-only payments during the draw period. That means your payment amount will spike when repayment begins. It also means that you could make payments for years and not make a dent in your debt. In contrast, home equity loan payments are usually level for the life of the loan. 

Some lenders use the terms "home equity loan" and "HELOC" to refer to the same thing. The specifics of your home equity loan or HELOC, which include your repayment term, rate, and loan amount, hinge on which lender you choose.  

How to get a $100k home equity loan or HELOC

Getting a $100,000 home equity loan or HELOC isn't much different from getting a loan to buy a home. You'll need to find a lender, apply, and meet their requirements to get approved. 

Home equity loan requirements usually focus on:

• Credit scores. Your credit scores tell lenders how you manage debt. A typical minimum credit score for a home equity loan or HELOC is around 640. Some lenders accept applicants with lower scores, so it’s worth a phone call if your score is below 640. A score higher than 640 could help you get lower interest rates. 

• Income. Lenders need reassurance that you have the money to make HELOC or home equity loan payments. Be prepared to share copies of your tax returns, pay stubs, or business records if you're self-employed. 

• Equity. You'll need to have sufficient equity to get a home equity loan or HELOC. Lenders limit the total amount you can owe on a property. For example, if the lender’s limit is 85%, that means that together, your mortgage and home equity loan balance can’t equal more than 85% of the value of your home.  

• Debt. Lenders also consider your debt-to-income (DTI) ratio, which measures how much of your income goes to debt repayment each month. The less debt you have, the better. 

A home equity loan or HELOC could be useful for debt consolidation, home improvements, or any other expense you need to cover. Whether you want to borrow $100,000 or just $10,000, take time to compare home equity loans and HELOC options to find one that's right for you. 

What's next

• Get a rate quote for a $100,000 home equity loan or HELOC to see what you might pay to borrow. 

• Use a home equity calculator to estimate what your monthly payments might be for a home equity loan or HELOC.

• Compare your estimated payments to your monthly budget to see if a $100,000 home equity loan is affordable.