HELOCs vs. home equity loans: Everything to consider right now

For most of the last two and a half years, home equity borrowing was one of the better ways to borrow money. As inflation surged and the federal funds rate rose alongside it, rates on borrowing products soared. And while home equity interest rates weren't immune, they remained much lower than credit cards and personal loans thanks to the home in question serving as collateral.

But with the first cut to the federal funds rate in more than four years just issued — and others looking likely for when the Fed meets again in November and December — the economic climate is changing again. Understanding this dynamic and the potential for it to affect home equity loans and home equity lines of credit (HELOCs), then, prospective borrowers should take a broader look at these two products. Below, we'll break down everything to consider for each right now.

See what home equity loan interest rate you could qualify for here.

HELOCs vs. home equity loans: Everything to consider right now

Not sure how to take the next step in your home equity borrowing process? Here's what to think about for both of these products currently:

HELOCs

• A higher rate: HELOC interest rates, while almost three times cheaper than credit cards and many percentage points lower than personal loans are still a bit higher than home equity loans right now (averaging 8.68% versus home equity loans at 8.35% as of November 1). While that difference doesn't seem major on paper, it could lead to a big difference in savings over a 10- or 15-year repayment period. 
• A rate that could change: HELOCs have variable interest rates that change monthly. While that may not be a huge factor if they change by a negligible percentage, it could either become problematic when rates rise (as they did in recent years) or be advantageous now that rates are declining again. Either way, though, it could be a challenge to accurately budget without knowing exactly what your rate will be from month to month.
• A revolving line of credit: A HELOC works like a credit card in the sense that it's a revolving line of credit. You'll only pay interest, then, on what you actually use, not the full credit line approved. And if you use it for eligible home repairs, you may be able to deduct it from your taxes when you file your next tax return.

Explore your best HELOC options online today.

Home equity loans

• A lower rate: As noted, home equity loan interest rates are slightly lower than HELOCs right now. And while the difference between 8.35% and 8.68% is unlikely to make a major difference in your monthly payments, the savings will add up over time. You won't need to be able to exploit a cooling rate climate as you would with a variable rate HELOC, however, so do your due diligence to find the lowest rate home equity loan possible. 
• A fixed rate that may need to be refinanced: A cooling rate climate is a plus for borrowers, but for home equity loan users, it will come with a cost. That's because home equity loan rates are fixed, and if rates fall after you've already secured your loan, as they seem likely to this November, you'll have to refinance to get the lower, prevailing rate. That could amount to 1% to 5% of the total loan amount in closing costs. Depending on the amount borrowed, that could be a significant sum. If you can't afford to pay to refinance, then, it may be worth taking the risk of a changing HELOC rate instead.
• Access to a large sum of money: The average home equity amount is approximately $330,000 right now, and most lenders will allow you to borrow up to 80% of your equity, leaving you with access to a large, six-figure sum to use as you see fit. But as the home market changes, that amount could rise or fall in response. So, if you know you need the money, now could be a good time to act.

The bottom line

HELOCs and home equity loans are smart and advantageous tools for homeowners right now. But they're not especially simple to use or to open, and borrowers will need to take a smart approach to ensure that they're both getting the best rate and product and that they're not overleveraging themselves to secure it. By truly understanding the above elements of each product now, borrowers can better determine if this is their best recourse for accessing a large amount of financing today.