HELOCs vs. home equity loans: What to consider before rate cuts
Something that hasn't been done since March 2020 will likely occur next week. The Federal Reserve will issue a cut to its benchmark interest rate, which has been stuck at a range between 5.25% and 5.50% for more than a year. That's the highest rates have been in more than two decades and borrowers who have applied for mortgages, personal loans and credit cards have had to paid more as a result.
Home equity loans and home equity lines of credit (HELOCs), however, have been cheaper alternatives for borrowers recently, mainly thanks to their homes serving as collateral in these circumstances. But an evolving rate climate will affect homeowners who borrow money via their equity, too. Applicants considering this option, then, should start doing their research now so they're better prepared to act before rates are formally cut.
Start by seeing what home equity loan interest rate you're eligible for here today.
What home equity borrowers should consider before rate cuts
The average homeowner has around $330,000 worth of home equity right now that they can utilize. But how much they borrow and how they should do it depends on the borrower. With rates set to be cut, then, borrowers should consider a few factors.
Fixed-rate or variable rate?
In the high-rate climate of recent years, a fixed-rate home equity loan made sense. By pursuing this option, borrowers knew exactly what their payments would be each month and they safeguarded their finances against any additional interest rate hikes. But now that rates are cooling and multiple rate cuts look possible, the variable rate that a HELOC comes with may be more advantageous.
HELOCs will adjust on their own, often monthly, while home equity loans will need to be refinanced to secure the lower, prevailing interest rate. Still, right now home equity loans have significantly lower interest rates (averaging 8.52% versus 9.99% for a HELOC). So you'll need to weigh the immediate savings with a home equity loan now versus what can be obtained with a HELOC in the future (and don't forget to account for home equity loan refinancing closing costs, too).
Compare the top home equity loans and HELOCs online now.
Is it worth waiting for rates to drop?
If you know what you need the money for and can afford to wait to withdraw the equity, then yes, it makes sense for interest rates to fall – if you want a home equity loan. But if you don't know exactly what you need the money for and prefer the flexibility of a revolving line of credit like a HELOC, then waiting for rates to fall will be futile.
As mentioned, HELOC rates adjust on their own so any savings that can be obtained via lower rates will materialize automatically with a HELOC. Determining if it's worth waiting for rates to drop, then, will largely depend on your intended use of the funds. And don't forget that both types are eligible to have the interest deducted from your taxes if used for eligible purposes, anyway. So today's higher rates may be negated if you use the funds for eligible home repairs and renovations and can thus write off the interest. But if your wait for lower rates extends into 2025 you won't be able to use the deduction until you file your tax return again in 2025.
The bottom line
As is the case with most financial products and services, the timing behind their use is key. And with rate cuts imminent, both home equity loans and HELOCs will be affected. How much they're affected and how that can influence your intended use, however, will depend on your personal financial situation. So weigh the benefits of a lower, fixed-rate home equity loan versus a higher-rate HELOC that comes with the inherent ability to change. By calculating these pros and cons carefully borrowers will better be able to determine if it's really worth waiting for rate cuts or if they're better acting right now.
Have more questions? Learn more about your best home equity borrowing options here.
