Short answer: a home equity line of credit (HELOC) is secured by your home, and in our example its rate is lower than a personal loan's. In exchange, the rate is usually variable, there can be fees to open it, and if you cannot repay you could lose your home (CFPB). An unsecured personal loan with a fixed rate has a set payment and end date and does not put your home on the line, but it costs more interest at the rates in our example.
How each one works
| HELOC | Unsecured personal loan | |
|---|---|---|
| What you get | A line of credit you can draw on repeatedly up to a limit during the draw period | One lump sum |
| Rate | Usually adjustable; the payment can change with the balance and the rate | Fixed or variable, as stated in the loan terms |
| Payments | A draw period, then a repayment period, often over 10 or 20 years, when payments are often much higher | With a fixed rate, the same payment each month until a set end date |
| Security | Your home; it is a second mortgage if you already have a mortgage | None |
| Costs to open | The lender can charge fees, and others may charge fees to open the plan too | Some loans charge an origination fee |
Sources: CFPB on HELOCs, CFPB on home equity loans vs HELOCs, 12 CFR 1026.40(d)(7) and (8). For how collateral changes a loan in general, see the secured vs unsecured guide.
What federal rules require for a HELOC
- Before you open the plan, the lender must give you the HELOC booklet and disclosures that state that it takes a security interest in your home and that you may lose the home if you default (12 CFR 1026.40(d)(3) and (e)).
- The disclosures must list the length of the draw and repayment periods, how the minimum payment is set, and, if minimum payments may not repay the principal, that a balloon payment may result (12 CFR 1026.40(d)(5)).
- For a variable rate, the lender must name the index, explain the margin, and state any limits on rate changes and the maximum rate (12 CFR 1026.40(d)(12)). The rate can only change with an index the lender does not control and that is available to the public (12 CFR 1026.40(f)(1)).
- The lender may stop further draws or cut the limit if, for example, the home value falls significantly below its appraised value or your finances change so that it reasonably believes you cannot repay (12 CFR 1026.40(f)(3)(vi)).
The 3-day right to cancel
Because a HELOC is secured by your principal dwelling, each owner whose interest in the home secures it can cancel the plan until midnight of the third business day after the plan is opened, after the cancellation notice is given, or after all material disclosures are given, whichever happens last. You cancel in writing. Until that period ends, the lender may not pay out money other than into escrow (12 CFR 1026.15(a) and (c)). An unsecured personal loan has no such right. Our guide on cancelling a personal loan explains the options there.
The math on a $15,000 project
Example assumptions, not offers: $15,000 for a project, repaid in 60 equal monthly payments. Personal loan at 11.90%, the average rate on 24-month personal loans in August 2026 (Federal Reserve G.19), with no fee. HELOC: $15,000 drawn at once, a variable rate of 8.00% in year 1, and $500 of costs to open it. The HELOC rates and the $500 are examples, not averages.
| Plan | Monthly payment | Interest | Interest plus $500 to open |
|---|---|---|---|
| Personal loan, 11.90% fixed | $332.91 | $4,974.60 | no fee in this example |
| HELOC, rate stays 8.00% | $304.15 | $3,249.00 | $3,749.00 |
| HELOC, rate rises to 10.00% after month 12 | $304.15, then $315.98 | $3,816.84 | $4,316.84 |
| HELOC, rate rises to 12.00% after month 12 | $304.15, then $328.08 | $4,397.64 | $4,897.64 |
How the rate changes are worked out: after 12 payments of $304.15 the balance is $12,458.34 (interest figured each month and rounded to the cent), and the payment is reset to repay that over the last 48 months. At 10.00%: 12 x $304.15 + 48 x $315.98 minus $15,000 = $3,816.84. At 12.00%: 12 x $304.15 + 48 x $328.08 minus $15,000 = $4,397.64. The payment formula guide shows the formula.
In this example the HELOC costs less even if its rate rises, but the payment changes and your home secures the debt. A bigger rise, higher costs to open, or a longer repayment period would change the result, so run the numbers with the rates and fees you are actually quoted. How a changing rate affects a loan is covered in the fixed vs variable rate guide.
Interest-only minimum payments
Some HELOCs allow payments during the draw period that do not repay principal. As an example, interest only on $15,000 at 8.00% is $15,000 x 8.00% / 12 = $100.00 a month, and at 10.00% it is $125.00. After years of such payments you still owe the full $15,000 when the repayment period starts, which is why payments are often much higher then (CFPB).
Is the interest tax deductible?
Per IRS Publication 936, interest on a home equity loan or line of credit is deductible only if the borrowed money is used to buy, build or substantially improve the home that secures the loan, and only if you itemize deductions on Schedule A (IRS Pub 936). Used for anything else, such as paying off cards, it is not deductible as home mortgage interest, and personal interest is not deductible. That is also true of interest on a personal loan used for personal expenses; our guide on whether personal loan interest is tax deductible covers the exceptions. Limits and other conditions apply. This is not tax advice; check the current Pub 936 or ask a tax professional about your own return.
When each one fits
- A HELOC can fit when you have equity, a project paid in stages, and a payment you can keep up with if the rate goes up.
- A personal loan can fit when you want a fixed payment and end date, do not want to put your home on the line, or have little equity.
- Either one is a poor fit if the payment is already a stretch. If you are having trouble paying your mortgage, the CFPB suggests talking to a HUD-approved housing counselor first.
For ways to pay for repairs without borrowing, see the home repair costs guide. The CFPB counselor referral line is (855) 411-2372 (CFPB).
Questions to ask before you choose
- HELOC: what is the index, the margin, any cap on rate changes and the maximum rate?
- HELOC: how long are the draw and repayment periods, and how is the minimum payment set in each?
- HELOC: what will it cost to open, including fees charged by others?
- Personal loan: what is the APR, is there an origination fee, and what is the total of payments?
- For both: what payment can I afford if my income drops?
Read the full CFPB booklet, What You Should Know About Home Equity Lines of Credit, before you apply. This guide explains federal rules in general terms and is not legal advice.
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Sources
- CFPB: What is a home equity line of credit (HELOC)?
- CFPB: What is the difference between a Home Equity Loan and a Home Equity Line of Credit (HELOC)?
- CFPB: What You Should Know About Home Equity Lines of Credit (booklet)
- Regulation Z, 12 CFR 1026.40(d) and (f): home equity plan disclosures, and limits on changing the terms
- Regulation Z, 12 CFR 1026.15: right of rescission (home-secured credit lines)
- IRS: Publication 936 (2025), Home Mortgage Interest Deduction
- Federal Reserve: G.19 Consumer Credit (released October 7, 2026), terms of credit, August 2026: credit card plans and 24-month personal loans
Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.