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Why a HELOC may be better than a home equity loan this spring

A HELOC offers multiple advantages over a home equity loan this spring, including variable rates.  Getty Images

If you need to remodel your home, repair your car, pay off high-rate debt or cover another large expense, tapping into your home equity may make sense. After all, these loans use your home as collateral, so they typically come with competitive interest rates and allow you to borrow large amounts of money. 

On the other hand, there's more than one way to borrow against your home's equity. Two of the most common ways to do so are home equity loans and home equity lines of credit (HELOCs)

But considering the current interest rate environment, a HELOC may be the better option this spring. Here's why.

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Why a HELOC may be better than a home equity loan this spring

Home equity loans typically come with fixed interest rates while HELOCs offer variable rates. So, a home equity loan will lock the rate in while a HELOC will adjust with the wider rate environment over time. That, in turn, may make a HELOC the smarter choice in today's rate environment. 

Over the last couple of years, the Federal Reserve has increased interest rates to combat inflation, and the inflation rate has declined year-over-year. Should inflation continue on the downward trend, interest rates could fall in the future. 

And, many experts expect the Federal Reserve to cut interest rates as early as mid-year. So, if you choose the HELOC route, you may not end up paying today's high interest rates for long.

"This is simply an interest rate question," says Mark Charnet, founder and CEO of American Prosperity Group, a financial planning firm. "If the borrower feels rates will fall in the short-term, a HELOC, which normally adjusts the interest rate monthly, may be a better opportunity." 

That said, HELOC interest rates can adjust in either direction. If inflation increases and interest rates tick upward, your HELOC interest rate could increase. But with the expectation that interest rates will decline soon, a HELOC may be your best option. 

Take advantage of what a HELOC can offer today

Other HELOC benefits to know

Variable rates aren't the only reason a HELOC may be the better option this spring. Other potential benefits include:

  • Borrowing options: With a HELOC, you aren't borrowing a lump sum from your home's equity. Rather, you can borrow from the credit line multiple times during the draw period (up to the HELOC limit). The draw period can vary but typically lasts about 10 years. 
  • Repayment flexibility: With a HELOC, you only make payments on the money you've borrowed. So, if you want to keep your payments to a minimum, simply keep your utilization of the credit line to a minimum as well.  
  • Tax benefits: If you use the money from your HELOC to repair or renovate your home, you may be able to write the interest off on your tax return, reducing your tax burden. It's worth mentioning, though, that this is a benefit of both HELOCs and home equity loans.  

Don't miss out on the benefits a HELOC can offer. Apply for a HELOC online today

The bottom line

Home equity loans and HELOCs are both effective ways to tap into your home equity when you need access to borrow money. But considering today's interest rate environment and the likelihood that rates could decline later this year, a HELOC may be your better option this spring.

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