Transparent method
The formula
Worked example
Example inputs
How to interpret the result
A HELOC starts with an interest-only payment on a variable rate, and a home equity loan has a fixed payment that pays the balance down. Borrowing $75,000, the HELOC payment is about $531 at 8.5 percent, while the fixed loan at 8 percent costs about $910. The lower HELOC payment is lower because nothing is repaid, and over a 10 year horizon the fixed loan comes out about $28,855 cheaper in this model. The gap changes sharply if the variable rate rises.
Before you rely on it
What to check
Test the HELOC at a rate a few points higher. A variable-rate payment that is comfortable today may not be at the top of its cap.
The common error
Where people go wrong with HELOC vs. home equity loan calculator
Picking the lower starting payment. Interest-only means the balance is unchanged when the draw period ends, and the payment then jumps to include principal.
Sensitivity evidence
How amount borrowed changes the fixed-loan lifetime cost advantage
| Amount borrowed | Fixed-loan lifetime cost advantage | HELOC interest-only payment | Fixed-loan monthly payment |
|---|---|---|---|
| $60,000 | $22,944 | $425 | $728 |
| $67,500 | $25,900 | $478 | $819 |
| $75,000worked example | $28,855 | $531 | $910 |
| $82,500 | $31,811 | $584 | $1,001 |
| $90,000 | $34,766 | $638 | $1,092 |
Every input, tested
Which input moves the fixed-loan lifetime cost advantage most
| Input | Tested from | To | Fixed-loan lifetime cost advantage at each end | Swing |
|---|---|---|---|---|
| HELOC variable rate | 6.5% | 10.5% | $13,855 to $43,855 | $30,000 (104%) |
| Home-equity loan rate | 6.0% | 10.0% | $38,132 to $19,114 | $19,017 (66%) |
| Comparison horizon | 7.0 years | 13.0 years | $20,732 to $36,305 | $15,574 (54%) |
| Amount borrowed | $67,500 | $82,500 | $25,900 to $31,811 | $5,911 (20%) |
| Home-equity loan fees | $1,080 | $1,320 | $28,975 to $28,735 | $240 (0.8%) |
| HELOC fees | $450 | $550 | $28,805 to $28,905 | $100 (0.3%) |
Two variables at once
Fixed-loan lifetime cost advantage by amount borrowed and HELOC variable rate
| Amount borrowed \ HELOC variable rate | 4.5% | 8.5% | 12.5% |
|---|---|---|---|
| $60,000 | -$1,056 | $22,944 | $46,944 |
| $67,500 | -$1,100 | $25,900 | $52,900 |
| $75,000 | -$1,145 | $28,855 | $58,855 |
| $82,500 | -$1,189 | $31,811 | $64,811 |
| $90,000 | -$1,234 | $34,766 | $70,766 |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Amount borrowed | $75,000 |
| HELOC variable rate | 8.5% |
| Home-equity loan rate | 8.0% |
| Comparison horizon | 10.0 years |
| HELOC fees | $500 |
| Home-equity loan fees | $1,200 |
| Fixed-loan lifetime cost advantage | $28,855 |
| HELOC interest-only payment | $531 |
| Fixed-loan monthly payment | $910 |
Where the inputs come from
The amount borrowed is the same for both. The HELOC rate is variable, so treat the number as a starting point, and the home equity loan rate is fixed. Comparison horizon is how long you expect to carry the debt. Fees are up-front costs quoted by each lender. If you plan to use the money in stages, HELOC draws differ from a single lump sum.
When the result stops applying
The model assumes the HELOC balance stays constant and interest-only, which is not how everyone uses a line. HELOC rates can change monthly and may have caps. Introductory teaser rates can expire. Comparison with a cash-out refinance is separate, because that replaces the first mortgage.
What to compare it with
Decide by how you will use the money and how long you will carry it. A defined expense over years suits the fixed loan, and ongoing or uncertain expenses suit the line. Stress-test the HELOC with a higher rate. If you will repay within a couple of years, the HELOC's lower fees may win. The HELOC payment and home equity loan calculators give each product's details separately.
People also ask
Frequently asked questions
Which is cheaper, a HELOC or a home equity loan?
It depends on the rate path and how long you carry the debt. A fixed loan is safer when rates rise.
When does a HELOC make sense?
A HELOC fits when you need money in stages, such as a renovation paid to contractors over months, or want a backup source of funds, and you expect to repay in a few years. Interest accrues only on what you actually draw.
Can a HELOC rate change?
Yes. Most HELOCs carry a variable rate tied to an index such as prime, so the payment can move after you open the line. A home equity loan avoids that risk because its rate is fixed for the life of the loan.