3 advantages of choosing a home equity loan over a HELOC

If you're already a homeowner, you may have a big advantage in today's rollercoaster housing market. 

"Limited housing supply has continued to boost home equity values for existing homeowners," says Colin Zizzi, CFP, founder of Zizzi Investments, as housing prices remain high even while interest rates rise. 

"People are far less eager to give up a 3 or 4% mortgage to move to a new house where they will have a 7% mortgage," Zizzi says. "These factors have made the housing market less affordable and attractive to new buyers, but have greatly increased the equity values for existing homeowners."

If you want to take advantage of that increased equity, common options include home equity loans and home equity lines of credit (HELOCs). Both have competitive interest rates and potential tax advantages when you use them for home improvements. But there are some distinct differences that can set these two loan types apart for homeowners looking to borrow from home equity today.

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3 advantages of choosing a home equity loan over a HELOC

Home equity loans and HELOCs both allow homeowners to tap into home equity without changing their existing mortgage loans. 

While either of these options can help you access cash at competitive rates today, home equity loans may be better suited for some borrowers. Here's what to know before you apply:

Lump sum loan

One of the biggest differences between home equity loans and HELOCs is in the name. While a HELOC allows you to borrow from a line of credit over a given period of time, a home equity loan is a loan offered as one lump sum. 

This can be an advantage for borrowers looking to use their home equity for one specific purpose. Say, for example, you've planned a kitchen remodel and already know exactly how much it's going to cost. Or, perhaps you want to put the money toward paying down your outstanding credit card balance. A lump sum loan can be useful for these large, one-time payments. 

Find out what home equity rates and terms you can score here now!

Fixed interest rate

When you take on a home equity loan, you'll likely be assigned a fixed interest rate, which will remain the same over the life of the loan. HELOCs, on the other hand, carry variable interest rates that can fluctuate over time.

While interest rates are higher today than they have been over the past few years, rates could fluctuate throughout your 20- to 30-year term. Locking in a fixed interest rate today can help guarantee that your APR won't continue to rise over time. If you have a variable interest rate, you may pay more than you expected over the entire loan term — but a fixed rate can provide more stability.

Also keep in mind that locking in a fixed rate today doesn't necessarily mean you're stuck with that rate long-term. Depending on how rates move in the future, you may be able to refinance the loan to a new, lower fixed interest rate.

Regular monthly payment

Along the same lines, a home equity loan's fixed interest rate also has the benefit of predictable monthly payments. 

When you're choosing a home equity product, "pay attention to the payment," says Eric Laub, CFP, founder of Finance 180. "Home equity loans usually have fixed rates of interest meaning your payment will stay the same for the duration of the loan … Be careful with making sure you are making the required payment and try to avoid borrowing more."

When you owe the same amount toward your loan each month, it can be easier to budget your incoming cash and outgoing expenses to fit the loan payment within your spending plan. This can be more difficult with variable-rate HELOCs, since your monthly payment may fluctuate as interest rates change over time.

Explore home equity options available for you and begin comparing rates today.

The bottom line

If you're considering tapping into home equity, the loan or line of credit you choose can make a big difference in how you use and repay the money. Home equity loans offer the benefit of predictable monthly payments, unchanging fixed interest rates and an upfront lump sum cash amount. This could be useful for borrowers who know exactly how much money they need and how they'll use it. But before you decide, make sure you compare different home equity lending options to find the right one for your specific goals. Get started today with top home equity rates available now here.