HELOC vs. Home Equity Loan: Which Is Right for Your Family?

Both let you borrow against home equity, but they work differently and cost differently. Use the calculator below to compare monthly payments and total interest — then read the 2026 tax rules before you decide which fits your family's situation.

Quick comparison

Tax deductibility in 2026: what the OBBBA changed

Home equity interest has always come with strings attached on the tax side — but the rules tightened in 2018 and then became permanent in 2025. Here's what matters for families:

Deductible: home improvement and acquisition

If you use a HELOC or home equity loan to buy, build, or substantially improve the home that secures the debt, the interest qualifies as "acquisition indebtedness" under IRC §163(h)(3) and may be deductible.² That means a $75,000 HELOC to add a bathroom, finish a basement, or replace a roof qualifies. The deduction matters only if you itemize (standard deduction is $32,200 MFJ in 2026).³

Not deductible: education, debt consolidation, vacations

Using a HELOC to pay college tuition, consolidate credit card debt, or fund a vacation does not create deductible interest — even though the loan is secured by your home. The IRS looks through to how proceeds are actually used, not how the loan is structured.²

The OBBBA made TCJA limits permanent

Under the 2017 Tax Cuts and Jobs Act, home equity interest for non-improvement purposes was suspended through 2025 and the combined mortgage debt limit for deductibility was reduced to $750,000 (from $1M for older loans). The One Big Beautiful Bill Act (OBBBA, July 2025) made these restrictions permanent — the TCJA changes were originally set to sunset in 2026, but they will not.⁴

Practical implication: if your outstanding first mortgage is $600,000, you can only deduct interest on an additional $150,000 of home equity debt used for home improvement (to stay at the $750K combined limit). Interest on amounts above that threshold is not deductible regardless of use.

When a HELOC makes more sense

• Multi-year remodel with uncertain costs. You draw as bills arrive from contractors. If the project comes in under budget, you owe less interest.
• Emergency reserve backup. Many families keep a zero-balance HELOC open as a lower-cost alternative to a high-interest personal loan. You pay nothing until you draw.
• Rate bet. If you believe rates will fall (prime rate has been dropping through 2026), a variable-rate HELOC could end up cheaper than locking in a fixed home equity loan rate today.
• College tuition spread over 4 years. Drawing $20K per year is cheaper than borrowing $80K on day one and paying interest on the full amount immediately. (Note: interest is not deductible for college use.)

When a home equity loan makes more sense

• Known lump-sum need. Replacing an HVAC system, paying a contractor's fixed bid, or consolidating to one payment works better with a single disbursement.
• Rate certainty matters to your budget. Dual-income families with tight monthly budgets often value predictability over rate optionality. A fixed payment that never changes is easier to plan around than a variable draw.
• Worried about discipline. A revolving HELOC is tempting to re-draw. A home equity loan is drawn once and you're done — there's no line to tap again after payoff.
• Rising-rate environment. When the prime rate is expected to increase, locking a fixed rate today protects you from future payment creep.

The HELOC payment shock trap

The biggest mistake families make with HELOCs is forgetting about the draw-to-repayment transition. During the draw period (typically 10 years), you pay interest only on what you've borrowed — a manageable number. When the draw period ends, the remaining balance is amortized over the repayment period (typically 20 years). That monthly payment is often 2–3× higher than the interest-only payment was.

Example: $75,000 HELOC at 7.25%, fully drawn. During the draw period: ~$453/month (interest only). When the 10-year draw ends and repayment begins over 20 years: ~$594/month. That's a 31% jump — while your income and other expenses may have grown, the payment shock catches many families off guard if they haven't planned for it.

Counter-strategy: make principal payments during the draw period to reduce the amount outstanding when repayment begins. The calculator above shows the repayment-period payment based on the full original balance — paying down the principal during the draw reduces both that payment and total interest significantly.

HELOC vs. cash-out refinance: the rate asymmetry problem

If your first mortgage rate is already below today's market rates (say, you locked at 3.5% in 2021), a cash-out refinance forces you to refinance the entire balance at a higher rate. For a $400K mortgage, moving from 3.5% to 6.5% costs roughly an extra $900/month. That's a steep price for accessing equity. A HELOC or home equity loan leaves your existing low-rate mortgage in place and only creates a second lien on the new funds. For most families with sub-5% first mortgages, a second-lien product is dramatically cheaper than a cash-out refi in today's market.

The mortgage refinance calculator can show you the all-in cost of a cash-out refi for comparison.

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