Though a home equity loan (HEL) and a home equity line of credit (HELOC) are similar in many ways, there are also some key differences.

As noted previously in this series, both can be good options if you want to tap into your home’s equity, but they differ in structure. A HELOC is attached to a revolving credit line of credit and usually has a variable interest rate that can fluctuate over the loan’s duration, whereas a HEL is a fixed-rate loan that gets dispersed in one lump sum.

Part 1 focused on HELOCs, breaking down their characteristics and main advantages and disadvantages. In this part, we’ll delve further into HELs by answering some of the most important questions to help you determine if this option is right for you.

Is it easy to qualify for a HEL?

Because HELs use your home’s equity as collateral, it’s generally easier to qualify for one than for other types of loans, such as a credit card or personal loan. Each lender has different requirements for qualifying for a HEL. These factors typically include your credit score, debt-to-income ratio, and loan-to-value ratio (the ratio between the amount you owe on your home and the appraised value).

Are there any restrictions on how you can spend the money?

One of the biggest advantages of a HEL is that there are no restrictions on how you can use the funds. This gives you the flexibility to spend the money in the way that best suits your needs.

You can make home improvements, pay off debt, invest in a property, or even start a business.

How are the interest rates compared to other home loans?

A HEL typically has lower interest rates than other loans since the lender uses your home as collateral, reducing their risk. With a lower rate, you may be able to borrow more (if there’s additional equity) or reduce the amount of your monthly payment.

Can you take a tax deduction on the interest?

Your plans for the money will determine whether or not you can deduct the interest on your loan. For example, if your goal is to make a sizeable improvement on your home that will prolong its useful life and add value to your property, you can most likely deduct the interest from your taxes. This applies to any primary or secondary home, including a single-family home, townhome, condo, mobile home, house trailer, or boat. However, sleeping, cooking, and toilet facilities must be present on your property to qualify.

Can you sell your home if you have a HEL? 

Even if you have an outstanding balance on your HEL, you can sell your home; the amount you owe will be deducted from the proceeds of the sale.

Are there closing costs?

Like a HELOC, you can expect to pay closing costs equaling 2 to 5 percent of the loan amount. These costs can include appraisal fees, origination fees, title insurance, and recording fees. Ensure you understand what costs you’ll need to pay so you’re not caught short at closing.