Does a HELOC or a home equity loan make more sense right now?

The economy is in a bit of a transition. Inflation has cooled considerably, and with the Federal Reserve recently cutting rates, the costs of borrowing have decreased, too. Rates on home borrowing products, in particular, are seeing an impact — including home equity loans and home equity lines of credit (HELOCs).

But while these two options are both getting more affordable, that doesn't mean they're a good fit for every homeowner. Below, we'll break down when experts say a home equity loan makes sense now — and when you might want a HELOC instead.

Considering access your home equity? See what rate you qualify for here now.

Does a HELOC or home equity loan make more sense right now?

Nor sure which of these options is best for you in today's unique economic climate. Then consider these factors:

If you want to ride the low-rate wave: HELOC

HELOCs usually have variable rates, so the rate you get right now will likely change over time. That's not great in times when rates are rising, but when interest rates are expected to fall? Things can only improve. 

"They're tied to the prime rate, which can be super beneficial during periods of low rates," says Clint Jordan, a real estate agent and founder of Mil-Estate Real Estate Network. 

This hasn't been the case in recent history. As Darren Tooley, a loan officer at Union Home Mortgage, explains, "Home equity loans have been considered a better alternative than HELOCs for the last couple of years. Now that we anticipate a rate-cutting cycle by the Fed, a HELOC might be a better option since every time the Fed cuts rates, the rate on your HELOC should go down accordingly."

See what HELOC rate you'd be eligible for here.

If you have one specific expense you need to cover now: Home equity loan

A home equity loan might be the right choice if you have a single large expense you need to cover soon. It could be a home or car repair or it might be an unexpected bill or medical cost. Whatever it is, a home equity loan can give you a large lump sum to cover it.

"If you need a large lump sum for a specific expense, a home equity loan might be the better choice," says Debra Shultz, vice president of lending at CrossCountry Mortgage. A HELOC, on the other hand, is better "If you need slow access to funds over time," she says.

Just be aware: Since home equity loans are usually fixed-rate products, the rate you get when you apply for your loan will be your interest rate for the entire loan term. That means you won't benefit from any additional rate cuts if the Fed opts for them, unless you move to refinance.

John Aguirre, a mortgage originator at Loantown, says don't fret, though. "The changes in rates are not going to make a noticeable impact on monthly cash flow for the majority of borrowers. You can always refinance."

If you need low payments right now: HELOC

HELOCs work a little differently than traditional loans. Instead of making full interest and principal payments from the start, you instead pay only interest for the first 10 years (this is called the draw period). This makes them great for consumers who need cash but don't have the funds for a huge monthly payment at the moment.

"You borrow only what you need, when you need it, and pay interest only on what you borrow," Shultz says. 

If you want stability: Home equity loan

As home equity loans are usually fixed-rate loans, more risk-averse consumers are better served by a home equity loan in most scenarios.

"Fixed-rate home equity loans provide much more certainty than variable-rate HELOC loans because homeowners can know their monthly payments before taking out the loan," Tooley says. "This allows the borrower to budget and know exactly what to expect monthly."

HELOCs don't offer this kind of predictability. And while they might allow you to take advantage of lower rates now, market conditions can change fast. When that happens, it could mean rising payments instead. "This can cause concern for many people," Tooley says.

Run the numbers

If you're considering tapping your home equity, it doesn't hurt to consider all your options — home equity loans, HELOCs and cash-out refinancing. Just reach out to a loan officer and have them run the numbers on all three scenarios to see which fits your needs and budget best. You can also use a broker to help you shop around for the best rate, too.