Why HELOCs are cheaper than home equity loans now

Home equity levels have skyrocketed over the last few years, and the average homeowner now has a home equity stake of about $320,000 — about $256,000 of which can be tapped into while maintaining a healthy 20% equity cushion. As a result, most homeowners have a significant pool of funds to tap into with a home equity loan or a home equity line of credit (HELOC), whether they're covering the cost of home repairs, remodeling their home, paying for education costs or funding another large expense. 

That isn't the only benefit that home equity borrowing offers right now, either. While the interest rate environment has been cooling recently, credit card and personal loan rates remain elevated, with the average card rate now sitting above 23%. Rates on home equity lending products are much lower comparatively, however, meaning that home equity loans and HELOCs are two of the most affordable options to consider in today's market.

If you're going to borrow from your home equity, though, you'll need to decide whether a HELOC or a home equity loan makes more sense. While both allow you to borrow against your home's equity, HELOCs, in particular, offer measurable savings in today's market. But why exactly are HELOCs cheaper than home equity loans right now? That's what we'll discuss below.

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Why HELOCs are cheaper than home equity loans now

While HELOC and home equity loan rates are both sitting in the 8% range currently, HELOC rates have been falling at a faster pace than home equity loan rates recently. That trend is due, in large part, to HELOC rates being variable, meaning that they rise or fall with changes to the federal funds rate. After the Fed slashed its benchmark rate for the third time in late December, HELOC rates began to fall, and they have continued to tick downward slightly in the time since. As a result, HELOCs now come with lower average rates than home equity loans. 

As of January 6, 2025, the average HELOC rate is 8.36% nationwide, while the average home equity loan rate is 8.41%, with 10-year fixed home equity loan terms averaging 8.55% and 15-year terms averaging 8.49%. That 0.05% difference between the average HELOC and home equity loan rates might seem modest, and in general, it is. However, even a slightly lower rate can translate into meaningful savings over time, particularly on larger loan amounts. 

HELOCs also come with a draw period (which is typically 10 years) that allows for interest-only payments during that time. This results in lower initial monthly payments compared to home equity loans. While this doesn't reduce the total amount owed, it provides valuable payment flexibility that can lead to significant short-term savings.

The revolving nature of HELOCs also means that you only pay interest on the amount you've borrowed — not on the full line of credit. For example, if you have a HELOC with a $50,000 limit but only draw $20,000 initially, you're only paying interest on the $20,000 you've borrowed. With a home equity loan, you're given a lump-sum loan, meaning that you pay interest on the full $50,000 from day one, regardless of when you need the funds.

Some HELOCs also offer introductory rates below the standard variable rate, providing even more potential savings in the first several months. These promotional rates can make HELOCs particularly cost-effective for short-term borrowing needs.

Learn what home equity borrowing rates you could qualify for here.

How to decide between a HELOC and a home equity loan

While HELOCs currently offer a slight edge in terms of initial rates, this advantage comes with an important caveat: variability. HELOC rates are variable, meaning that they adjust based on the prime rate, so your costs could increase if market rates rise. This variability makes HELOCs somewhat riskier than their fixed-rate counterparts, particularly in an uncertain rate environment.

Home equity loans, on the other hand, lock in your rate for the entire term, providing predictable monthly payments and total cost clarity. However, this security comes at a premium — you're paying slightly higher rates for the guarantee of fixed payments. There's another potential downside, too: If market rates fall significantly, you'll be stuck with the higher rate unless you refinance, which incurs additional closing costs of between 2% to 5% of the loan amount on average.

If you're unsure which option makes more sense for you, it may help to weigh the following factors:

• Why you're borrowing: If you need funds for a single, large expense, a home equity loan's lump sum and fixed rate could be appealing. For ongoing or unpredictable expenses, a HELOC's flexibility might make more sense.
• What the market trends are: With current HELOC rates slightly lower, they could be the cheaper option for short-term borrowing, but rising rates could make them more expensive over time. If you prefer stability, a home equity loan's fixed rate might be worth the extra cost.
• The loan term you need: For long repayment periods, a fixed-rate home equity loan provides predictable payments. For shorter terms or quick repayment, a HELOC could save money.
• The cost of refinancing: If you opt for a home equity loan and rates drop significantly, refinancing could lower your costs — but the fees might negate potential savings.

The bottom line

HELOCs currently offer a marginal rate advantage, so if you're looking for the home equity borrowing option with the lowest rate right now, a HELOC could be the right option. In general, though, the best choice depends more on your circumstances than the small rate differential. For example, a HELOC might offer better value if you're comfortable with rate variability and plan to borrow gradually. However, if you need a large lump sum and prefer payment predictability, the peace of mind from a fixed-rate home equity loan could be worth the slightly higher cost.