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3 timely HELOC benefits that home equity loans don't offer

A HELOC could be better than a home equity loan in today's economic environment.  Getty Images

Home equity loans and home equity lines of credit (HELOCs) are two common ways to tap into your equity when you need it. But, they're very different financial products. Home equity loans offer fixed rates and payments alongside lump-sum funding. HELOCs offer variable rates and payments with more flexibility in terms of funding. 

So, if you're thinking about tapping into your home equity, you may be torn between the two. 

However, in today's economic environment, HELOCs come with timely benefits that you won't have access to if you take the home equity loan route. Before getting started, then, it helps to understand what these benefits are and how they may apply to you.

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3 timely HELOC benefits that home equity loans don't offer

While both home equity loans and HELOCs have unique components, a HELOC has features that are particularly advantageous right now. Here are three to know:

HELOCs typically come with variable interest rates

While home equity loans typically come with fixed interest rates, HELOC rates are usually variable. And variable rates could be a positive when you consider today's high interest rates. After all, if you use a home equity loan to access the funding you need, you'll pay today's high rates until you pay the loan off - or at least until you refinance it

On the other hand, if you use a HELOC to access the funding you need, your interest rate will evolve with the larger interest rate climate. And, there are signs that interest rates could fall ahead. After all, with inflation slowing, the Federal Reserve may cut its federal funds rate in the future. That's important because financial institutions regularly use the federal funds rate as a benchmark to determine what interest rates they'll charge consumers. So, if the Fed does cut its benchmark rate, HELOC rates could fall, too. 

Since HELOCs typically come with variable interest rates, you could benefit from any future rate cuts if you use one instead of a home equity loan. 

Take advantage of the variable rates HELOCs offer today

HELOCs usually start with interest-only payments

HELOCs are structured in periods. They start with a draw period that typically lasts between five and 10 years and makes it possible to tap into funding when you need it (up to the HELOCs limit). And, you're only usually required to make interest payments during the draw period - which could make a HELOC more affordable than a home equity loan for the first several years. 

However, a repayment period follows the draw period. This period is when your payments will address interest and your principal balance. Nonetheless, if you choose a home equity loan, there is no draw period and you'll be required to start making interest and principal payments immediately. So, your initial cost burden with a home equity loan could be higher than it would be with a HELOC. 

HELOCs provide flexible access to funding

HELOCs offer more flexibility in terms of funding than home equity loans. When you take out a home equity loan, you receive all of your funding at once. On the other hand, when you open a HELOC, you may be able to draw against your equity when you need it for years to come. There are a couple of reasons that flexible access to funding may be better in today's economic environment: 

  • You shouldn't borrow more than you need: It's important to limit your borrowing to what you need. After all, when you borrow more money, you'll need to contend with higher payments. But with a home equity loan that only offers funding once, you may need to borrow more to make sure you cover all bases. With a HELOC, you can start by borrowing a minimal amount of money and increase the amount you borrow over time if the need arises. And, if you borrow more than you need, you can pay it back during the draw period to limit your payment requirements in the repayment period. 
  • New financial needs may arise: If you choose a home equity loan and a new financial need arises, you'll need to apply for a new loan. On the other hand, if a new financial need arises during your HELOC draw period, you may already have access to the funding you need.   

Learn more about your HELOC options today

The bottom line

If you're torn between a home equity loan and a HELOC, you may want to veer toward the HELOC. While both options can put the funding you need in your pocket, HELOCs come with variable interest rates, a draw period with interest-only payments and flexible access to funding - all of which are positive qualities in today's economic environment that home equity loans don't offer. However, each individual homeowner's borrowing circumstances are different so it's important to carefully evaluate both options before proceeding.

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