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After minor increases in recent weeks, both home equity loan and home equity line of credit (HELOC) interest rates declined again this week, according to new data released by Bankrate. The average home equity loan rate declined to an average of 8.36% (down from 8.40%) while the average HELOC rate fell below 8% again, this time to 7.94%. And with a declining inflation rate and, thus, additional motivation for the Federal Reserve to reduce its federal funds rate (which helps drive home equity loan rates), the costs of borrowing with either home equity product could soon fall further.
That noted, HELOCs and home equity loans work in similar but not identical ways. So the use of either in today’s unique economic climate will need to be carefully considered, especially since the home in question functions as collateral in either exchange. Fail to repay what’s been borrowed and you could see your home foreclosed on by the lender. But with rates declining on both products this week, which is smarter for homeowners to use right now? That’s what we’ll analyze below.
Start by seeing what HELOC rate you’d be eligible for here now.
Is a HELOC or home equity loan smarter to use now?
There is no uniform answer to this highly specific question. Instead, the answer largely depends on your borrower profile and your intended use for the funds. Here, then, is when either could be the smarter option in today’s economic climate:
Why a HELOC could be smarter to use now
Simply put, a HELOC is the smarter option for those who want to be well-positioned to exploit a cooling rate climate. That’s because a HELOC, unlike a home equity loan, has a variable interest rate that will change monthly for borrowers. While that’s a risk in an economy when rates are increasing, it’s a distinct advantage now that HELOC rates have declined by around two percentage points since September 2024.
Should additional rate reductions come in the weeks and months ahead as expected (the CME Group’s FedWatch tool has a Fed rate cut listed as a 61% likelihood for June), HELOC rates will decline, too. And borrowers won’t need to refinance and pay the refinancing closing costs as they would with a home equity loan, as the line of credit’s interest rate will adjust independently. So, if you want to pay as little interest as possible and want to be in a position to pay even less in the short term, a HELOC could be the smart way to do so now.
Get started with a HELOC online today.
Why a home equity loan could be smarter to use now
On the other hand, recent economic uncertainty makes a home equity loan the smarter choice for many homeowners. It’s difficult to predict where the economy will head in the months to come and a number of factors could cause interest rates to stagnate or even to potentially rise again, which could make a HELOC quickly unaffordable.
Home equity loans don’t come with that same volatility and concern as the low rate you lock in today will remain the same until the loan is repaid – or until you refinance to secure a lower rate in the future. And it’s not like the difference between today’s HELOC and home equity loan rates (less than half a percentage point) is so stark as to render a home equity loan useless. So consider calculating the costs of using both to determine if the slightly cheaper monthly HELOC payment is worth sacrificing the security a home equity loan offers now.
The bottom line
There’s no definitive way to determine if a HELOC or home equity loan is smarter to use now that rates are declining again on each. Both borrowing tools are specific to the homeowner and their approach to today’s developing interest rate climate. What’s unequivocal, however, is that they’re both materially less expensive than personal loans and credit cards, each of which have average interest rates in the double digits right now. So, if you want to borrow money in today’s economy and have a reasonable way to pay back what you withdraw, either a HELOC or a home equity loan could be the smart way to do so.
