Why a home equity loan could be better than a HELOC this January
With the average homeowner in possession of approximately $320,000 worth of home equity right now, your home may be your best option for borrowing large sums of money. And with products like home equity loans, home equity lines of credit (HELOCs), reverse mortgages and cash-out refinance loans, there's no shortage of ways to do so. But not all of these options are created equally and some, like home equity loans, can be more advantageous than others, especially in the uncertain economic climate of January 2025.
With inflation rising in the last two readings and interest rate cuts seemingly on pause, a home equity loan has emerged as the clear preferred option for many homeowners, particularly when stacked against a HELOC. But, why, exactly, is a home equity loan better than a HELOC this January? Below, we'll list three important factors to consider currently.
Need to borrow a large sum of money? Find out how much home equity you could withdraw here.
Why a home equity loan could be better than a HELOC this January
Here are three hard-to-ignore reasons why a home equity loan is preferable to a HELOC, at least for the foreseeable future:
A fixed interest rate
A variable interest rate may have been favorable in the final months of 2024 as the Federal Reserve moved to cut its federal funds rate three times, but the outlook for additional rate cuts looks uncertain now that inflation jumped in October and November. Against this backdrop, then, a fixed rate, which home equity loans come with, can be the better option. By opening a home equity loan at today's average of 8.41%, homeowners won't need to worry about rates stagnating or rising in the months to come as they'll be locked in for the full repayment period (unless they refinance). A fixed rate is a traditional benefit for most borrowers, but particularly home equity users, and especially so this January.
See what home equity loan interest rate you could qualify for here.
A lower interest rate
That 8.41% home equity loan rate is lower than a credit card (averaging over 23% currently) and a personal loan (close to 12%). And it's about the same as a HELOC, which is averaging just 0.05% lower at 8.36%. On a $100,000 loan, that's the difference of around $3 a month. And while every dollar helps, particularly over a 10- or 15-year repayment period, that HELOC rate will adjust multiple times during that time. So a few dollars saved right now could quickly become prohibitive, especially if the interest rate climate ticks up again.
Predictability amid economic uncertainty
Inflation was steadily declining for a portion of 2024 – until it wasn't. Interest rates were steadily being cut – until they weren't. Both developing factors underline the economic uncertainty many borrowers face at the start of the new year. Adding any unnecessary volatility to worry about should then be avoided. A home equity loan can help by offering predictability amid this uncertainty. Thanks to its fixed rate and structured repayment plan you'll know exactly how much you'll need to pay and when it needs to be paid without having to worry about any economic headwinds that could affect rates and payments (as you would with a HELOC).
The bottom line
A home equity loan with a fixed interest rate, inherent predictability in the face of economic uncertainty and a lower interest rate than some popular alternatives, could be the smart way to borrow a substantial amount of money in 2025. That said, no matter which home equity option you ultimately choose, you must be able to pay back all that's been withdrawn. Since your home is collateral in these exchanges, you could risk losing it if you're unable to make your payments as agreed upon. So go into the borrowing exchange clearly and strategically.
Have more home equity loan questions? Learn more here now.
