Personal loan or home equity? What to compare first

Written by Samantha SheltonNMLS 1647301Updated October 2026

Compare what each loan is tied to before you compare anything else. A personal loan rests on your promise and your credit, while a home equity loan or line of credit puts a lien on your house. Then compare closing costs, how and when the money arrives, how long you will carry the debt, and what you are paying for. Home equity often looks cheaper precisely because your home backs it.

Samantha Shelton, who owns Align Lending, starts every one of these conversations in the same place, and it is not with a rate: “Why. That’s my first question. What are we using the money for?” Her view of home equity fits in three short sentences: “Your house isn’t an ATM. Equity is valuable. So there should be a reason behind using it.”

This guide walks through that comparison with the public data behind it. If you already know you want to use equity, our guides to how a HELOC works and home equity loans go deeper on each one.

Key takeaways:

• The collateral matters most: A personal loan is usually unsecured. A home equity loan or HELOC is secured by your home, and the CFPB says plainly that if you cannot repay, the lender could foreclose.
• Price follows risk: Home equity borrowing often costs less in interest because your house stands behind it, and it usually carries closing costs a personal loan does not.
• The money arrives differently: A personal loan pays one lump sum. A HELOC lets you draw what you need when you need it, after a three business day cancellation window.
• Tax treatment depends on the use: The IRS lets you deduct interest on a loan secured by your home only to the extent the money buys, builds or substantially improves that home, and only if you itemize.
• Michigan owners already use equity: About 210,500 owner-occupied Michigan homes, 7.1%, carry a home equity loan or line, per the Census Bureau’s 2020 to 2024 American Community Survey.

What is the real difference between a personal loan and home equity borrowing?

The real difference is what the lender can take if the loan goes unpaid. The price, the paperwork and the timeline all follow from that one fact.

A personal installment loan, as the CFPB describes it, is closed-end credit: the lender gives you all of the money at the beginning and you repay it on a fixed schedule. Most are unsecured. The CFPB’s teaching guide on secured and unsecured loans explains why that matters to price: with no collateral, the lender carries more risk, so unsecured loans may carry a higher rate.

A home equity loan pays a lump sum and, per the CFPB, usually carries a fixed rate. A home equity line of credit works more like a credit card with your house behind it: you draw against a limit, repay and draw again during the draw period. Behind an existing first mortgage, either one is a second mortgage, or junior lien.

Why does home equity often cost less, and what does that discount buy?

Home equity often costs less in interest because the lender can fall back on your house. That is the whole reason for the lower price: the discount is paid for with your home.

The CFPB says it directly in its guidance on consolidating credit card debt: rates on a home equity loan may be lower, but if you do not repay, you could lose your home in foreclosure. Closing costs can run from hundreds to thousands of dollars, a drop in value can leave you underwater, and tapping equity can leave no cushion for repairs.

Samantha’s test is whether the loan solves the problem or moves it. Talking it through, she says, is often when “the person realizes they’re solving a short-term problem by creating a bigger long-term one.” Credit card balances moved onto a house are the clearest case: debt that could once only hurt your credit can now cost you the home, and if the cards fill back up, you carry both.

None of that makes equity the wrong choice. For a new roof, a failing kitchen or an addition you will live with for twenty years, money borrowed against the house and spent on the house is often the cleanest fit. The point is to choose it on purpose.

How do the two compare side by side?

Here is the comparison row by row. Neither column wins every line, which is why the purpose of the money comes first.

What does each one cost to open?

A personal loan usually costs less to open, and a home equity loan or line usually costs less to carry. Put both on paper, because a short borrowing need can flip the answer.

The CFPB lists the charges that can come with a personal installment loan: an origination fee, a documentation fee, credit or disability insurance that is generally optional, and late fees. Home equity borrowing works more like a small mortgage: an appraisal or automated valuation, a title search, a county recording fee and lender fees, and a HELOC can add annual or early termination fees. A home equity loan comes with a Loan Estimate; a HELOC comes with home equity disclosures and the CFPB’s HELOC booklet under 12 CFR 1026.40. Our guides to comparing HELOC lenders and closing costs walk through each fee.

Here is a hypothetical, for illustration only. You need $15,000 for a furnace and expect to pay it off within a year or two: fixed closing costs weigh heavily on a balance that small and that short. Now say you need $60,000 for an addition you will pay down over many years: the same closing costs are spread across a larger balance and a longer stretch. Same house, same owner, two different answers.

Hypothetical example, not an offer. Actual rates, costs and payments vary.

What HELOC terms should you read before you compare it with a personal loan?

A personal installment loan repays on a fixed schedule. A HELOC’s payment can change shape partway through its life, so read these terms before you put the two side by side.

• The draw period and what follows it. The CFPB’s HELOC explainer (last reviewed August 28, 2026) says a draw period could last 10 years, for example, that repayment is often scheduled over ten or 20 years, and that monthly payments are often significantly higher once repayment begins.
• Interest-only and balloon terms. The CFPB’s HELOC booklet (last updated August 2022) notes that some plans allow interest-only payments during the draw period, so nothing goes toward principal, and that some plans require the entire balance at once, a balloon payment.
• How the rate and draws are set. The same booklet names the U.S. prime rate and the Constant Maturity Treasury rate as common indexes, warns about introductory rates that are unusually low for a short period, such as six months, and says some plans require a minimum draw each time, for example $300.
• Fixed-rate conversion and early closing. Some HELOCs let you move part or all of the balance to a fixed rate, which the CFPB says is usually higher than the variable rate but more predictable. Its list of HELOC fees (last reviewed June 27, 2024) includes a conversion fee and a cancellation fee for ending the line early, usually within the first two or three years.

Two protections come from Regulation Z itself, 12 CFR 1026.40. If a disclosed term changes before the line opens, other than a change caused by movement in the index of a variable-rate plan, and you decide not to open it as a result, the lender must refund all fees paid in connection with the application, appraisal and credit report fees included, whether they went to the lender or to third parties. A change in a third-party fee that was disclosed as an estimate does not by itself earn that refund. And for a drop in home value, the rule lets a lender stop new draws or lower the limit only after a significant decline: the official interpretation says a fall that cuts the original gap between the credit limit and the available equity by fifty percent counts. In its example, a house appraised at $100,000 with a $50,000 first mortgage and a $30,000 line has a $20,000 gap, so a fall in value to $90,000 is enough.

Hypothetical example, not an offer.

How fast can you get the money from each?

A personal loan is usually quicker, because there is no house to value and no lien to record. When you borrow against your principal home, other than to buy it, Regulation Z gives you three business days to cancel after you sign (12 CFR 1026.15 for lines, 1026.23 for loans), and the money is not released until that window closes.

Timing is also where a HELOC earns its keep. As Samantha puts it, “having equity and having that money available at the exact moment you need it are two different things.” A line you draw only when the contractor’s invoice arrives gives you access without paying interest on money still sitting in the bank.

How many Michigan homeowners already borrow against their homes?

About 210,500 owner-occupied Michigan homes carry a home equity loan or line of credit, 7.1% of the state’s 2,984,190 owner homes, close to the national 6.9%, according to the Census Bureau’s American Community Survey table B25081. The Bureau’s “home equity loan” category includes lines of credit, and since 2020 it also counts a HELOC on a home with no first mortgage, as its 2021 user note explains. Most equity sits untouched: 42.2% of Michigan owner homes have no mortgage at all.

Across the counties Align serves most, the share runs from 6.3% in Wayne County to 10.2% in Ottawa County. Wayne, where 48.5% of owners have no mortgage at all, sits at the bottom of the list.

Source: U.S. Census Bureau, ACS 2020 to 2024 5-year estimates, table B25081, from the Bureau’s table-based summary file. Counts are survey estimates.

Is home equity borrowing growing in 2026?

Yes, steadily. Balances on home equity lines of credit reached $459 billion in the second quarter of 2026, according to the Federal Reserve Bank of New York’s Household Debt and Credit Report: $142 billion above the 2022 low and the 17th quarterly rise in a row, though still about a third below the $714 billion peak of early 2009. Part of the climb is owners with a low first mortgage rate who would rather borrow beside it than replace it.

Is the interest tax deductible on either one?

Sometimes on home equity, generally not on a personal loan. The use of the money decides it. IRS Publication 936 treats interest on a loan secured by your home as deductible mortgage interest only to the extent the money buys, builds or substantially improves the home that secures it, within the publication’s limits, and only if you itemize; the IRS’s 2018 guidance gives the example that paying off credit cards does not qualify. Personal interest is not deductible under Tax Topic 505. Check the current Publication 936 or a tax professional; Align does not give tax advice, and our guide to mortgage interest deductions covers the basics.

How does each one show up on your credit?

Both start with a hard inquiry and a new account on your credit reports, and both add a monthly obligation that counts in your debt-to-income ratio the next time you apply for a mortgage. A personal loan is installment debt with a payoff date; a HELOC is a line with a limit. If you plan to buy or refinance soon, ask before opening either one; our guide to improving your DTI shows how the number moves. Your reports are free at AnnualCreditReport.com, the CFPB’s credit reports and scores guide explains disputes, and USA.gov summarizes your credit report rights.

What other ways to borrow does the CFPB set beside these two?

The CFPB’s page on loans similar to a HELOC (last reviewed June 27, 2024) lists options that sit between an unsecured personal loan and a lien on your house.

• A personal line of credit lets you borrow based on your credit instead of using your home as collateral. Per the CFPB, limits may be lower and rates higher than on options backed by your home. It draws like a HELOC, with no lien.
• A credit card lets you borrow up to its limit, at regular rates the CFPB calls typically higher than options that use your home as collateral.
• A cash-out refinance replaces your mortgage with a bigger one and pays you the difference; depending on the terms, the CFPB says, it may be more or less expensive than a HELOC.
• A retirement plan loan appears in the comparison table of the CFPB’s HELOC booklet (August 2022), generally up to 50% of your vested balance or $50,000, whichever is less.

How does a home equity contract compare with a home equity loan?

It works differently, and its cost grows with time and your home’s value. The CFPB’s January 15, 2025 report on home equity contracts, also sold as home equity investments, home equity agreements or shared equity agreements, found that under many contracts the settlement amount grows at 19.5% to 22% a year in the early years. In the report’s example, a homeowner who takes a $50,000 upfront payment would repay between $68,045 and $71,538 after three years, depending on how the home’s value moved. Repayment is due at the end of a term of usually 10 to 30 years, or at a triggering event such as a sale, and an owner who cannot pay the full settlement risks having to sell the home or facing foreclosure.

Hypothetical example, not an offer.

When does a personal loan make more sense?

Samantha’s question decides it: what is the money for? A personal loan tends to fit when the amount is modest, the need is short and the money is not going into the house.

• The balance is small and you will repay it fast. Fixed home equity closing costs weigh most on a small, short loan.
• The money is not for the home. A car repair or medical bills will not make home equity interest deductible.
• You plan to sell soon. A home equity loan or line is paid off from your sale at closing, and closing costs on a line you will close within months rarely pay off.
• You have little equity. With a high loan-to-value ratio, a home equity lender may have little room to lend.
• You want the house kept out of it. That is a legitimate choice, and a lower interest cost is not worth a loan you lose sleep over.

When does home equity make more sense?

Home equity tends to fit when the money goes into the home, the amount is larger and the repayment runs longer: the lower interest cost has time to outweigh closing costs, and the house that secures the loan is the thing getting better.

• A real project on the home. A roof, a furnace, a kitchen, an addition. Compare the options in refinancing for home improvements and financing renovations.
• Costs that arrive in stages. A HELOC lets you draw as invoices come in and pay interest only on what you have drawn.
• A first mortgage you want to keep. A standalone home equity loan or line leaves its rate alone; a cash-out refinance replaces it. Samantha’s caution applies to both: “I don’t think somebody should refinance just because somebody called them and told them they could.” See the pros and cons of cash-out refinancing.
• A clear reason and a repayment plan. “Equity is valuable. So there should be a reason behind using it.”

What should you ask before you sign either one?

Samantha’s standard for every answer here is her own: “I’d rather say, ‘Let’s check,’ than tell somebody something that doesn’t apply to them.” Bring these questions to any lender, including us, and expect specific answers in writing.

1. What is this money for, and does the loan match it?
2. What does it cost to open, in total, including third-party charges and any optional insurance?
3. What does it cost to keep and to close? Annual, inactivity, early termination and prepayment charges.
4. Is the rate fixed or variable, and what are the caps? On a HELOC, ask for the index, the margin and the maximum rate.
5. What happens to my access if my home’s value falls? Federal rules let a HELOC lender freeze or reduce a line in set situations.
6. How does this change my debt-to-income ratio?
7. Is the company licensed? Look up any mortgage lender or broker on NMLS Consumer Access.

If debt is the reason you are borrowing, talk to a nonprofit counselor first, as the CFPB suggests: a HUD-approved housing counselor or the National Foundation for Credit Counseling. The FDIC’s free Money Smart lessons cover borrowing basics, and pressure to sign blank pages or skip disclosures belongs at ReportFraud.ftc.gov.

Michigan: what changes when you borrow against a home here

Your property taxes do not uncap. A Michigan home’s taxable value resets the year after a transfer of ownership, and a loan secured by the home is not one under MCL 211.27a, so a long-time owner who borrows keeps the cap. Treasury explains transfers of ownership; our Uncapping Study measures the jump when a home does sell, and our guide to Michigan taxable value has the details.

Foreclosure here usually happens outside court. A Michigan mortgage with a power of sale can be foreclosed by advertisement, without a lawsuit, under MCL 600.3201, and a home equity lien is a mortgage. Borrow only what you have a plan to repay, and if you fall behind, call your servicer early and a HUD-approved counselor.

The state licenses who you borrow from. Michigan’s Department of Insurance and Financial Services licenses mortgage brokers, lenders and servicers and takes complaints, and the Attorney General’s consumer protection team handles scams.

What does Michigan law add when a loan is secured by your home?

Michigan writes rules for home-secured borrowing that do not reach an unsecured personal loan.

• A second mortgage has its own statute; a personal loan does not. Michigan’s Secondary Mortgage Loan Act, MCL 493.51, covers a home equity loan that sits behind your first mortgage, and its definition of a broker includes anyone who acts as an agent for a borrower seeking one. An unsecured personal loan puts no lien on the house, so this act never reaches it.
• A HELOC and a home equity loan are not treated alike. The Department of Insurance and Financial Services’ Consumer Mortgage Protection Act FAQ lists subordinate lien mortgage transactions among the transactions the act covers and leaves out open-end credit in which the lender reasonably expects the borrower to take multiple advances, which is how a home equity line of credit works. The choice between a lump-sum equity loan and a line can change which Michigan protections apply.
• A denial comes with a reason. The DIFS Consumer Guide to Mortgage Rights in Michigan (revised June 2024) says the reason a lender refuses a mortgage is identified in a Notice of Adverse Action, and that complaints go to DIFS.

Michigan home values decide how much room a home equity lender has to work with. The Federal Housing Finance Agency’s House Price Index report, released August 25, 2026, shows Michigan prices up 3.80% from the second quarter of 2025 to the second quarter of 2026 and 38.80% over five years, against a 2.1% rise for the country over the year. A statewide index is an average, though, which is why a home equity lender values your own house before it sets a limit.

How Align helps you decide

Align Lending does not make personal loans. Align is a Michigan mortgage broker, so the loans it arranges are secured by homes: standalone HELOCs, fixed home equity loans and cash-out refinances, placed through multiple wholesale lenders. That is why this comparison matters: a loan against your house should be the right tool for the job, not the only tool on the table.

In Samantha’s words: “That’s why I don’t start with, ‘Here’s the product you need.’ I start with, ‘Tell me what you’re trying to do.'” The Home Equity Review asks why you want the money before it suggests anything, and Cash-Out vs. Home Equity compares the two ways to reach your equity without naming a winner until your numbers are in. Start at our home equity guides, read using home equity wisely and second mortgages, check any term in the mortgage glossary, or run your own numbers on the calculators page.

FAQ: Personal loan or home equity

Should I use a personal loan or home equity for a home improvement project?

It depends on the size of the project and how long you will carry the cost. Home equity often fits larger projects repaid over years, and the interest may be deductible when the money improves the home. A personal loan often fits smaller, shorter projects and keeps your house out of it.

Can I lose my house over a personal loan?

A personal loan puts no lien on your home when you sign. If you stop paying, the lender can send the debt to collections and may sue, and a court judgment can lead to further collection steps. A home equity lender already holds a lien and can foreclose, so the risk to the house is direct with equity.

Is home equity loan interest tax deductible?

Only to the extent the money buys, builds or substantially improves the home that secures the loan, within the limits in IRS Publication 936, and only if you itemize. Equity used for credit cards or a car does not qualify. Personal loan interest for personal purposes is generally not deductible.

Which is faster, a personal loan or a HELOC?

Usually a personal loan, because there is no home to value and no lien to record. A home equity loan or line on your principal home also has a federal three business day right to cancel after signing, and the money is released only after it closes.

Should I use a HELOC to pay off credit cards?

Think hard first. The CFPB calls using home equity to consolidate credit card debt risky, because unpaid card debt can now cost you the house, and the interest is not deductible for that use. A nonprofit credit counselor is a good first call.

What closing costs come with home equity borrowing?

Often an appraisal or automated valuation, a title search, a county recording fee and lender fees, plus annual or early termination fees on some HELOCs. The CFPB says closing costs can run from hundreds to thousands of dollars.

Does borrowing against my Michigan home uncap my property taxes?

No. Michigan resets taxable value after a transfer of ownership, and a loan secured by the home is not one under MCL 211.27a. You keep your capped taxable value as long as you own the home.

Does a HELOC hurt my credit more than a personal loan?

Both start with a hard inquiry and a new account on your reports, and both add a monthly obligation lenders count in your debt-to-income ratio. If you plan to buy or refinance soon, ask your loan officer before opening either one.

Does Align Lending offer personal loans?

No. Align is a Michigan mortgage broker, so it arranges home-secured loans: HELOCs, home equity loans and cash-out refinances, through multiple wholesale lenders. Samantha can walk you through how a home equity option compares with a personal loan offer you already have, and will tell you if your home is not the right place to borrow.

Will applying with several home equity lenders hurt my credit?

It depends on the product. The CFPB says multiple credit checks from mortgage lenders within a 45-day window are recorded as a single inquiry, which covers shopping a home equity loan. A HELOC is a line, not a one-time loan, so ask each lender how it reports its check. Its guidance, last reviewed August 28, 2026, also suggests avoiding other credit applications during the mortgage process, personal loans included.

The bottom line on personal loans and home equity

Start with what the money is for. Then compare the collateral, the cost to open and to keep, how the money arrives and how long you will carry it. Home equity can be the cleaner tool for a real project on the house; a personal loan can be the safer one for a smaller, shorter need. Either way, choose on purpose, because, as Samantha says, “Your house isn’t an ATM.”

This article is for informational purposes only and is not intended to provide legal, financial, or tax advice. Rates, fees, and loan programs vary by lender, borrower, and market conditions; confirm your actual numbers on each lender’s disclosures and consult a qualified professional about your situation. Figures shown are illustrative, are not a rate quote or an offer of credit, and are subject to change. Align Lending is an independent Michigan mortgage broker, NMLS #2041154.

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