Is a home equity loan or HELOC the better option this January? Experts weigh in

Over the last four months of 2025, the Federal Reserve cut the federal funds rate by a total of 75 basis points, lowering its benchmark rate to the current 3.50% to 3.75% range. While the Fed rate doesn't directly set home equity borrowing rates, they often move in the same direction. As a result, these rates ticked down slightly in the last quarter of 2025, and average rates today for home equity loans and home equity lines of credit (HELOCs) stand at 8.16% and 8.22%, respectively.

Meanwhile, unemployment fell slightly in December while the inflation rate increased to 2.7%, which is still above the Fed's 2% goal. The CME Group's FedWatch tool now projects a high likelihood of the Fed holding interest rates steady at its January meeting. These factors are also helping to shape the wider borrowing rate landscape and significantly impacting home equity lending options, namely home equity loans and HELOCs. 

If you're considering accessing your home equity in January, it's essential to understand how these products differ in the market right now and which borrowing option is the best fit for your situation. To help you determine which option is best, we asked home equity lending experts to weigh in on which option could make more sense under current conditions.

Find out how affordable your home equity borrowing options are now.

Why a HELOC could be the better option this January

With a home equity line of credit, instead of receiving a lump sum loan amount, you get a revolving line of credit that you can draw from as needed and will only pay interest on the amount you borrow. HELOCs come with variable interest rates that are tied to a benchmark like the prime rate, meaning that they can change with the wider rate environment. That can be risky when rates are rising, but it may be beneficial right now.

"A HELOC has benefits because it offers flexibility at a time when rates may gradually trend lower. Since HELOCs typically have variable rates, borrowers could benefit if rates decline over the coming months," Kelly McBride, a senior mortgage loan officer at Florida Listing Experts, says. 

The experts we spoke with all noted that interest rates aren't expected to drop in January, but indicators suggest they may decrease throughout 2026. 

"With the belief that rates will hold steady in January and likely edge lower through 2026, a HELOC may position you to take advantage of a lower rate during the time you have the HELOC over the next 12 to 24 months," says Mason Whitehead, a branch manager for Churchill Mortgage.

Compare the home equity borrowing rates you could qualify for today.

Why a home equity loan could be the better option this January

Opting for a home equity loan in January won't allow you to take advantage of potentially lower rates through 2026, as these equity-based borrowing options are issued as a single lump sum payment with a fixed interest rate, one that won't change in a shifting rate environment. That's a good thing if you want a more predictable, stable borrowing option. 

After all, if HELOC rates go up during your term, your monthly payment would also rise. On the other hand, a home equity loan's fixed rate gives you predictable monthly payments that don't change over the course of your loan term, no matter what ultimately happens with the economic landscape.

"A home equity loan can be the better decision for borrowers who need certainty and long-term stability," says McBride. "If someone knows exactly how much money they need and plans to keep the loan for several years, locking in a fixed rate can provide peace of mind. The payment won't change, even if rates move higher."

How to decide which home equity option you should use now

There are valid reasons why borrowers might want to tap their home's equity with a home equity loan or HELOC this January, whether that's consolidating high-rate debt, funding home improvements or buying a second home. But there are also drawbacks to this approach, and for some, it's hard to know which direction to go. So how should you approach the decision?

To start, consider your borrowing timeline and your goals, Sarah DeFlorio, vice president of mortgage banking at William Raveis Mortgage, says. During that process, focus on how each product works to help guide your decision. 

"I always frame a HELOC as a more flexible option. Since you can pay down the principal and borrow again, it is, in effect, a piggy bank for the typical 10-year interest-only period," DeFlorio says. 

But, DeFlorio warns that with this type of financing, you need an exit strategy. "Either pay down the principal balance before it starts amortizing, or refinance both your first and second mortgages to avoid a very significant jump in monthly payments," she says.

A home equity loan, on the other hand, may be a better fit for borrowers who want set payments and a clear payoff plan. 

"There are different reasons why someone would apply for a home equity loan, and if you are someone who does not have the luxury of a bonus or commission income to pay off debt, having an amortizing payment plan to pay it off would mean the loan is a better answer," DeFlorio says.

The bottom line

In addition to home equity loans and HELOCs, you could also explore whether a cash-out refinance, which pays off your current mortgage and replaces it with a larger one, makes sense. This option still lets you access some of your home's equity, but you'll need to make sure that you're not trading a low rate for a much higher one in the process. Ultimately, though, whether you tap into your home's equity — and which lending option you choose — depends heavily on your financial situation and your goals this January and in the future.