Home equity loan vs. HELOC: Which is better in today's rate environment?

If you're a homeowner in need of extra cash, you may be considering a home equity loan or home equity line of credit (HELOC). Both of these options can help you access the equity you've built in your home at rates that are often much more affordable than other borrowing options.

But there are differences to consider when deciding which product to choose, including the Federal Reserve's latest interest rate pause. By carefully weighing these factors, you can identify the best route for your needs and budget.

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Home equity loan vs. HELOC: Which is better in today's rate environment?

Here's what you need to know to determine if a home equity loan or HELOC is best for you with today's rate where they are.

How home equity loans and HELOCs work

A home equity loan allows you to borrow a lump sum and pay it back over a set term with a fixed interest rate. This means your monthly payment will stay the same for the life of the loan, which can make budgeting easier and provide stability in an unpredictable rate environment. Payments begin promptly after you receive the funds.

A HELOC is a revolving line of credit that allows you to borrow against the equity in your home as you need it, up to a certain limit. The interest rate is usually variable and tied to the prime rate, which means your monthly payment can fluctuate over time.

HELOCs have a draw period, during which you can borrow money, and a repayment period, during which you must pay back the borrowed amount plus interest. The draw period is typically around 10 years, and the repayment period can be up to 20 years.

Both options can be a smart choice for homeowners who need funds in today's rate environment. Home equity rates are typically significantly lower than credit card and personal loan rates, which can save you hundreds of dollars in interest depending on how much you borrow.

In addition, both home equity loans and HELOCs come with potential tax benefits. If you use the funds for IRS-approved home improvements or repairs, you may be eligible to deduct the interest you pay come tax time.

Compare your home equity loan and HELOC options online now.

When a home equity loan may be better

A home equity loan could be your best choice in the following situations:

• When you want protection from rate increases: Rates are currently paused, but some experts predict they could hit double digits by the end of 2024. By locking in a home equity loan rate now, you can shield yourself from paying more interest if rates do rise.
• When you want predictable payments: Because home equity loan interest rates are fixed, you always know how much your monthly payments will be. This can help you better determine if you can afford them and save you stress if overall rates increase.
• When you need a large, lump-sum amount: Home equity loans are best suited for sizeable expenses where you know precisely how much you'll need. Homeowners often use them for purposes like debt consolidation and home improvements for this reason.

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When a HELOC may be better

A HELOC may be your best option in these circumstances.

• When you want to take advantage of rate decreases: What goes up must come down, and eventually, rates will begin to drop. When this happens, you can enjoy lower interest charges if you choose a HELOC since the rate is variable. This can cut down on your total borrowing costs.
• When you can afford a variable payment: That said, a variable rate means you can't predict exactly how much your monthly payments will be over the duration of repaying your HELOC. So, you should be sure you can afford potentially higher payments to avoid putting yourself in a tight financial position down the line.
• When you want ongoing access to funds: If you're not sure how much money you'll need, or you want to cover ongoing expenses as they arise, a HELOC is a better fit for you. You can access funds any time you need them during the draw period, and you'll only repay what you borrow. This can give you flexibility and potentially save you money since you won't risk taking out more than you actually need.

The bottom line

In today's rate environment, both home equity loans and HELOCs can be good options for homeowners who want access to their equity to cover a variety of costs. Which one you choose depends on your financial situation and borrowing needs.

Weigh the pros and cons associated with each option and consider seeking advice from a financial professional before making your final decision. Once you've decided, take the time to research and compare your options to find the best rates and terms for your needs. With some careful planning, you can use your home equity to get the funds you need at a cost you can afford.