Is a HELOC or home equity loan better for borrowers now?

In today's high inflation and soaring gas prices environment, many Americans may require additional funds to cover essential expenses. Borrowing money can be challenging as credit cards have double-digit rates and increase the risk of compounding financial difficulties. Homeowners can consider home equity lines of credit (HELOCs) and home equity loans as viable alternatives.

While these options generally provide lower rates than credit cards and offer substantial loan or credit limits, the choice between them depends on individual circumstances.

HELOCs offer a revolving line of credit, allowing borrowers to access funds as needed and only pay interest on what they draw. They are useful in unpredictable markets with regularly increasing prices. HELOCs currently have lower rates than home equity loans, which is beneficial in today's climate. However, HELOCs have variable interest rates that can fluctuate with market conditions and Federal Reserve moves.

This poses a risk of rate increases if the Federal Reserve raises interest rates in the near future, as indicated by the CME Group's FedWatch Tool. In such a scenario, home equity loans, which have fixed rates, could be a more stable choice.

Home equity loans provide a lump-sum loan with a fixed interest rate for the entire loan term. This feature can be advantageous in a volatile economic landscape, as it ensures consistent payment for the loan duration. Home equity loans can protect borrowers from potential rate hikes and help them maintain budget predictability. Additionally, these loans prevent borrowers from overspending, as they can only withdraw the predetermined loan amount.

However, HELOCs may be more suitable for borrowers who prefer flexibility and are cautious about overspending.