Disclaimer: Citi may have different eligibility criteria and/or product offerings than those mentioned on mortgage.com.

First things first: HELOCs and home equity loans are both ways to use the equity you’ve been building in your home. It’s a chance to turn all the hard work of making on-time mortgage payments into cash you can use for anything from home improvements to paying for grad school.

Keep in mind, these options do serve different needs based on how they’re structured. First, let’s take a look at the basics. Then you can start thinking about how each option would fit into your big-picture life goals.

Home equity loan

A home equity loan provides a lump sum payout with a fixed interest rate. This option may make sense if you need a specific amount of money upfront and prefer predictable monthly payments for simpler budgeting. An example would be if you need to consolidate high-cost debt with a lower interest rate, or if you have a home project in the works and you know exactly how much it’s going to cost.

Home equity line of credit (HELOC)

A HELOC offers a flexible line of credit with a variable interest rate. It’s almost like a credit card that’s secured by the value in your home. You’ll be able to tap into funds as needed, and the balance gets replenished as you make payments. HELOCs also typically have a yearly maintenance fee (similar to a credit card fee) of $50 to $200 regardless of whether you use the HELOC. It’s best for large, ongoing projects where the total cost is a bit unknown, like a major home renovation with a crew of contractors.

Still on the fence? For a different perspective, let’s look at the pros and cons. Ask yourself: Do I need a big chunk of change for a one-time expense? Or do I need some cash on hand for an ongoing project or goal?

As you can see, HELOCs are pretty flexible—you borrow and repay on your terms, and you only pay interest on what you use. Plus, as you pay it off, you can tap into it again. But keep in mind, the interest rates can bounce around, so your costs might go up.

Now let’s take a closer look at a home equity loan.

So, with a home equity loan, you get a fixed interest rate, which makes budgeting a breeze, and you receive a lump sum that's perfect for big purchases. Just remember, you don't have as much flexibility in borrowing, and once you've used the funds, that's it—no replenishing.

Let’s compare the two from a different angle by looking at similarities and differences. This will give you a better idea of how they compare.

Here’s a rundown of what they have in common:

• Secured by your home’s equity: Both options use your home as collateral, meaning unpaid loans could put your home in jeopardy.
• Possible tax benefits: You can probably look forward to tax benefits on the interest you pay, no matter which option you choose. Consult your tax advisor about your particular situation.  
• Designed for large expenses: Both are made for significant expenditures. They can help you cover home renovations, educational expenses, medical emergencies, debt consolidation and other big-ticket needs.
• Closing costs: Both HELOCs and home equity loans come with closing costs—typically 2% to 5% of your credit line or loan amount.

While both options have a lot in common, they do differ in certain ways.

Here’s where things contrast:

• Delivery method: HELOCs deliver funds as you need them during what’s called the “draw period,” while a home equity loan provides a lump sum amount after closing.
• Interest rate types: HELOCs come with the ups and downs of variable interest rates, while home equity loans let you coast along with steady, predictable payments.
• Repayment terms: HELOCs offer flexible repayment options, while home equity loans require regular, consistent payments.

You may have heard of both a home equity loan and a HELOC being referred to as a second mortgage. Let’s break it down.

What's a second mortgage?

A second mortgage is any loan that involves borrowing against the value of your home, after the first mortgage. It's called a "second" mortgage because it's in a second lien position to the first mortgage, which would be the first lien position. If you default on your loans, the first mortgage gets paid off from the sale of the house before the second.

Home equity loans & HELOCs as second mortgages

Both home equity loans and HELOCs are types of second mortgages. They both allow homeowners to borrow against the equity they have built up in their home. Equity is the difference between the value of your home and the amount you still owe on your first mortgage.

How do they relate to CLTV?

When you’re looking to secure a second mortgage, whether it’s a home equity loan or a HELOC, lenders will whip out their calculators and figure out your combined loan-to-value (CLTV) ratio. This fancy term just means they add up what you want to borrow and what you still owe on your first mortgage, then divide that by your home’s current market value.

CLTV in action
If your home is worth $1 million and you owe $700,000 on your first mortgage, but you want to borrow $100,000, your CLTV would be 80% ($800,000 ÷ $1,000,000).

Lenders love this ratio because it helps them decide how much they’re comfortable lending you. They usually cap it at about 80 to 90%, depending on the risk involved. This cap ensures there’s still some equity left in your home, which acts like a safety net for both you and the lender.

It really depends on your financial situation, how you plan to use the funds and how you prefer to manage debt. Here are a few questions to ask yourself:

Do you have a good idea of how you’ll use the cash?

If the answer is yes, then a home equity loan may make sense. If not, a HELOC offers more flexibility and potentially lower costs if your spending needs will vary over time. If your plans are a little uncertain, a HELOC allows you to draw funds as needed, which can be handy for ongoing expenses.

Are you comfortable with fluctuating payments?

If you can handle interest rates that rise and fall, a HELOC might be more your speed. The upside of a HELOC is that you only pay interest on the funds you’ve tapped into, not the full credit line amount. Just be mindful of how shifting rates affect your overall budget.

Do you want consistent monthly payments?

If planning ahead is your thing, a home equity loan has a fixed interest rate and identical monthly payments throughout the loan term. This makes these loans a popular option for budget-conscious borrowers who like to keep things consistent.

When choosing a home equity loan or a line of credit, think about your financial needs, plans, preferences and even your personality. When you’re ready to take the next step, we’re here to help!

Now for the nitty-gritty. Securing a home equity loan or a HELOC involves steps you’re probably familiar with as a homeowner. But let’s review so you know exactly what to expect.

1. Make sure you meet the basic requirements: Before getting set on either option, check to see if you meet the approval criteria. This includes a good credit score, sufficient home equity and a stable income.
2. Call an appraiser: Knowing the value of your home is vital. Your appraisal will determine how much equity you have, which impacts how much you might be able to borrow. Like with a conventional mortgage, the lender will order their own appraisal, but you can also hire an appraiser to conduct a desk review or drive-by assessment to get a good sense of what the property is worth.
3. Gather key documents: Dig up the paperwork and digital files that show proof of income, property specs and details of your current mortgage.
4. Contact your lender: Want someone to guide you through the application process? A lending specialist will be happy to help you from start to finish, so nothing delays your progress.
5. Apply online: You can also hop online to fill out an application. If you get stuck, you can always stop by a local Citi branch or reach out via phone or chat.
6. Review the fine print: Make sure to read all terms, conditions and disclosures provided by the bank. As CEO of your financial life, it’s your duty to stay informed, but we’re here to assist if you get bogged down by financial lingo.
7. Pay closing costs: Be prepared for upfront costs and fees, which can vary depending on the lender and loan type.
8. Set up automatic payments: Though it’s not required, setting up automatic payments from your spending or savings account can help you stay on course. Set it, forget it and protect your good credit.