3 reasons why a HELOC is better than a home equity loan now
If you're a homeowner with a decent amount of equity in your home, you can likely leverage it in multiple ways. A cash-out refinance, for example, in which you take out a new loan for an amount larger than your current mortgage balance, could provide you with extra cash right now. A reverse mortgage, on the other hand, could provide older homeowners with monthly payments directly from their accumulated equity, giving them a reliable way to make ends meet in today's uncertain economic climate.
Home equity loans and home equity lines of credit (HELOCs) are also viable options. Both use the equity in the home as a financing source for homeowners, with the former being provided as a lump sum with the latter functioning as a revolving line of credit. And while both function in similar ways and have the same funding source, there's a compelling case to be made in today's economy for choosing a HELOC over a home equity loan. Below, we'll help explain why.
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3 reasons why a HELOC is better than a home equity loan now
Here are three compelling reasons why a HELOC is better for homeowners than a home equity loan this spring:
A significantly lower interest rate
HELOC interest rates are declining on an almost weekly basis in 2025, the latest drop coming this week to an average of 7.90%. Home equity loan rates, during the same period, however, actually ticked up slightly from 8.37% to 8.40%, making them a full half percentage point higher than HELOCs.
A difference of 50 basis points is significant on paper and arguably more so when making monthly repayments, particularly considering the common 10- or 15-year repayment periods HELOCs come with. That difference could add up to significant savings over time, assuming the rate differential remains constant. So, if you're looking to pay less to borrow home equity now, a HELOC is your clear better choice.
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A climate in which rates are continuing to fall
HELOC rates have been on a steady decline for more than six months now, dropping by approximately two percentage points since September 2024. Already in 2025, they've hit 18-month and two-year lows, respectively. And thanks to a variable rate that changes for borrowers, that's a material difference that can be felt monthly.
Home equity loans, meanwhile, have stagnated and are just four basis points lower than where they were in November 2024. And even if that trend reverses, borrowers will need to refinance their loan (and pay refinancing closing costs) to secure a new, lower rate, while HELOC borrowers can exploit today's cooling climate free of charge.
A different repayment structure
When home equity loan rates are lower than HELOC rates, the payment structure of having to make immediate payments on the lump-sum loan can be advantageous, as it will save the borrower interest costs. But now, with the opposite rate trend, it can be better to pursue the HELOC.
That's because, with HELOCs, you'll typically make interest-only payments during the draw period, which can be minimal now with the average rate declining. Only after that period concludes and the repayment period kicks in will you be expected to make full payments. Just be sure to calculate your repayments with as much precision as possible with a variable-rate HELOC, to ensure affordability both now and long into the future.
The bottom line
A HELOC, thanks to currently lower average rates than home equity loans, a rate structure better positioned to exploit future rate drops, and a repayment structure that behooves borrowers in today's unique rate climate, is arguably better than a home equity loan right now. Still, every homeowner's financial situation and goals are different, so it's worth exploring both home equity borrowing options carefully. Calculate repayment costs closely, too, to ensure that this type of product is really the right one in today's economy and over the long term.
