HELOC vs a home equity loan
A home equity loan pays a lump sum and starts paying it back immediately. A HELOC lets you borrow, repay, and borrow again during a draw period, and the payment often jumps when that period ends.
Both use the equity in the home as collateral. Equity is the value of the home minus the amount you already owe. The Consumer Financial Protection Bureau describes a home equity loan as a specific amount borrowed against that equity, received in a lump sum, with a rate that may be fixed or adjustable. A home equity line of credit, a HELOC, is open-end: you can draw more than once, up to a limit, and paying the balance down restores the available credit, in the way a card does. If you already have a mortgage, both are typically second mortgages, paid in addition to the first. The interest-only and HELOC calculator shows the draw-period payment and the payment after repayment starts. It holds the rate still. A real HELOC usually does not.
A line, then a repayment period
The CFPB’s HELOC explanation splits the life of the line into a draw period and a repayment period. During the draw, you can borrow up to the credit limit, often with checks or a card. Ten years is the example the CFPB uses for how long a draw can last. Some plans require a minimum draw, a minimum outstanding balance, or an initial advance. You can pay during the draw. Some plans set a minimum payment that includes a little principal and still does not pay the line off by the end of the draw. Other plans allow interest only, which means the principal does not fall at all.
When the draw ends, you stop borrowing and the repayment period starts. The CFPB says the lender may set a schedule to repay the balance, often over 10 or 20 years, and that the monthly payment is often significantly higher. Some plans require the entire balance at the start of repayment. That is a different, and larger, jump than an amortizing repayment. The calculator on this site assumes the second stage amortizes the balance that is still outstanding. It does not model a balloon of the whole balance due at once.
HELOCs usually have a variable rate, so the payment can change every month during the draw, not only when repayment starts. The CFPB notes that some lines let you convert some or all of the balance to a fixed rate, and that the fixed rate is usually higher than the variable rate and more predictable. If the home’s value falls, or the lender decides you may not be able to pay, the lender can freeze further draws. The limit you were approved for is not a guarantee that the money will still be available later. The CFPB’s booklet on HELOCs is the longer official version of those risks, including the fact that the home is the collateral.
A lump sum that amortizes from the first month
A home equity loan, which the CFPB also calls a second mortgage in this context, is closed-end. You receive the amount once. You do not draw it again. Repayment is a schedule of payments that pays off the loan. The rate may be fixed, so the principal-and-interest payment can stay the same, or adjustable. There is no interest-only draw built into that description. The payment on day one already includes principal, unless the note says otherwise.
The CFPB’s comparison of products that resemble a HELOC lists the home equity loan, a cash-out refinance, a personal line of credit, and a credit card. A cash-out refinance replaces the existing mortgage with a larger one and gives you the difference. It has its own closing costs, and the CFPB says to look hard at the rate if it is higher than the rate on the mortgage you are replacing. A personal line does not use the home as collateral. The limit is often lower and the rate often higher. A card is revolving credit without the house attached, at a rate that is typically higher than a loan secured by the home. Those are different contracts. A lower rate on a loan secured by the home is the other side of the risk the CFPB states directly: if you cannot repay, you could lose the home.
Second position matters when the home is sold to pay the debts. The CFPB says the “second” loan is paid second. If the sale does not cover both, the second-mortgage lender may not be paid in full. That is one reason second mortgages often carry higher rates than first mortgages. It is also why adding one increases the payment you already have. The first mortgage does not go away.
Worked example
The amount is $60,000. The rate typed for both is 7.5%. It does not move, which is the calculator’s assumption and not the usual HELOC. The line has a 10-year interest-only draw and then 15 years of amortization. The home equity loan amortizes the same $60,000 over 15 years from the first month, with no tax, insurance, or mortgage insurance in the payment. The mortgage payment calculator is what produces that amortizing payment.
- During the draw, the interest-only payment is the balance times the monthly rate: $375.00. No principal is paid. After 10 years the balance is still $60,000, and the interest paid during the draw is $45,000.00.
- Repayment then amortizes $60,000 over 15 years at the same rate. The payment becomes $556.21. The jump from the draw payment is $181.21, which is 48% higher. Interest during repayment is $40,116.90. Interest over the whole line is $85,116.90.
- The home equity loan’s principal-and-interest payment, from the first month, is $556.21. Total interest over 15 years is $40,116.90. There is no draw, so there is no jump later, and the balance starts falling in month one.
- The same $60,000 at the same rate, amortized over the line’s full 25 years instead of sitting interest-only for the first 10, has a payment of $443.39 and total interest of $73,020.87. The interest-only draw costs $12,096.03 more in interest than that full amortization, because the principal waited.
The draw payment is lower because it is not paying the loan down. The later payment is higher because the same balance is then squeezed into the repayment term. A home equity loan that lasts only 15 years never has the cheap decade, and it also never has the jump. A line that lets you pay principal during the draw lands between those two, and this example does not show that middle case. A variable rate would move every one of these payments. The calculator cannot show a rate it has not been given.
What the payment leaves out
Closing costs on either product can include an appraisal, title charges, and recording. The CFPB says some HELOC lenders waive some of those costs and others do not. An application fee may be non-refundable if you are turned down. Those dollars are not in the monthly figures above. A minimum outstanding balance, or a fee for a draw, changes the cost of using the line and is not in the interest math.
The first mortgage’s payment, taxes, and insurance continue. The debt-to-income ratio a lender computes will include the new payment next to the old one. The debt-to-income calculator is the place to add them. How much of the home’s value a lender will lend against is a credit and program decision. Nothing here looks up a combined-loan-to-value cap.
Interest may or may not be deductible. That is a tax question with its own rules, and this page does not apply them. The risk the CFPB repeats is the collateral. A payment that fits the draw period and fails in the repayment period is a default on a loan secured by the home, not only a budget problem.