$100,000 home equity loan vs. $100,000 HELOC: Which will be cheaper after a September rate cut?
With the average home equity level around $300,000 now and with the total amount of borrowable home equity reaching yet another new record level this week, homeowners in need of a large amount of affordable financing may understandably be looking toward their home now. And with options ranging from cash-out refinances to reverse mortgages to home equity loans and home equity lines of credit (HELOCs), there's no shortage of viable ways to borrow equity right now.
Still, interest rates on HELOCs and home equity loans are low now and they've been on a recent decline. And, unlike cash-out refinances, they won't require the homeowner to exchange their current mortgage rate for a presumably higher one. And, unlike reverse mortgages, they'll be available to most homeowners, not just those age 62 and older. Plus, with rate cuts on the horizon when the Federal Reserve meets again in September, both home equity loans and HELOCs could become even more affordable than they already are.
This is an especially important consideration for those homeowners looking to borrow $100,000 from their home now. Repayments on an amount this large will need to be as inexpensive as possible. Borrowers should examine both options carefully. Between a $100,000 home equity loan and a $100,000 HELOC, then, which could be cheaper after a September rate cut? That's what we'll analyze below.
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$100,000 home equity loan vs. $100,000 HELOC: Which will be cheaper after a September rate cut?
Currently, HELOC and home equity loan rates are in the 8% range. The average HELOC rate is 8.12% while home equity loan rates range from 8.23% to 8.40%, depending on the length of the loan term. Both have dropped in recent weeks after rising from where they were in the spring. HELOC rates in April, for example, sat below 8% for a brief period. Home equity loan rates, meantime, have been comfortably over 8% all year. So which, then, will be cheaper after a September Fed rate cut?
That's hard to answer with precision but if recent history is an indicator, HELOCs will be. That's because the variable rate nature of a HELOC makes it better positioned to respond to market dynamics and changes in the rate climate. While that can be a disadvantage when rates are rising, as they had been before 2024, it's a distinct advantage now with multiple rate cuts issued in 2024 and potentially more on the horizon. Home equity loans will also respond to a cooling rate climate, but perhaps not as dramatically. And the reality is that HELOC rates are already more than 10 basis points, on average, lower than the lowest home equity loan rate. So if that variability in rates holds, they'll continue to be the cheaper option, even if home equity loan costs fall slightly in response to rate cuts, too.
But with rates on both less than half a percentage point different now and with that relationship likely to stay consistent at least for the short-term, borrowers will need to look beyond the numbers and determine which type of product is best suited for their needs. A variable rate product is generally better when rates are on the decline, as they appear to be now, but a changing monthly payment can be hard to manage, even for the most judicious borrowers. A fixed rate, however, is predictable and easy to budget for. Still, you'll miss the opportunity to exploit rate reductions to come and, even if you ultimately refinance the loan, it'll come with closing costs that will need to be accounted for.
With these considerations in mind, then, and with the unknown of rate cuts ahead, homeowners should consider speaking to a financial advisor or home equity lending specialist before getting started. Both can help answer your questions and guide you toward the most appropriate (and affordable) option.
Speak with a home equity lending representative now to learn more.
The bottom line
HELOCs could be the more affordable option for homeowners after a September rate cut, at least compared to a home equity loan. But this is difficult to know for sure and, right now at least, rates on both products are approximately the same. So, if you're unsure about which is right, consider taking a broader look, that encompasses not only future rate changes, but also evaluates the way repayments on each are structured, in addition to your budget, plans and goals. By completing a wide evaluation, you can better determine which of these products will be more advantageous not just after a predicted September rate reduction, but in the months and years after as well.
