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

Between today's high inflation and soaring gas prices, more Americans may be finding themselves in need of extra cash to cover their essentials. Borrowing money isn't always affordable in today's landscape, though. After all, credit cards come with double-digit rates and increase the risk of compounding financial challenges even further.

For those who own a home, home equity lines of credit (HELOCs) and home equity loans can be good alternatives. These equity-tapping options generally come with lower rates than credit cards and many other lending products, and they can offer access to large loan or credit line limits that can be used for nearly any purpose.

But which is the best option in today's climate? Here's what experts say homeowners should think about before choosing a home equity product now.

Find out more about your home equity borrowing options online now.

Why a HELOC could be better for borrowers now

The big difference between HELOCs and home equity loans is that while home equity loans offer access to a one-time, lump-sum loan, HELOCs give you longer-term access to a line of credit that can be drawn from, usually over a period of 10 years. You can use the money for nearly any purpose during that timeframe.

This can be a handy tool in today's market, where prices can be unpredictable but are regularly increasing. 

"It's a revolving line," says Amanda Erebia, executive vice president and director of retail banking at Amegy Bank. "You can access funds as you need them and only pay interest on what you've drawn."

HELOCs can also save you on interest right now. Case in point? The average HELOC rate sits in the low 7% range these days, while home equity loan rates are about one percentage point higher.

"Rates between the two are very close, but HELOC rates are just slightly lower in most instances," says Matt Kroon, home loan specialist at Churchill Mortgage.

Compare today's top HELOC and home equity borrowing options here.

Why a home equity loan could be better for borrowers now

While there are some reasons to get a HELOC right now, experts say there's also a lot of benefit to choosing a home equity loan. For one, a home equity loan can protect you from rate increases.

Home equity loans are fixed-rate products, which means you'll have the same interest rate for the entire loan term, which lasts anywhere from five to 30 years. Most HELOCs, on the other hand, have variable interest rates. Your rate can change often based on market fluctuations and Federal Reserve moves.

That typically means home equity loans are better amid a climate of rising rates, while HELOCs tend to be best when rates are falling. According to the CME Group's FedWatch Tool, there's a good chance the Fed will increase interest rates later this year. This would mean higher rates for HELOC holders, too. 

"HELOC rates are tied to the prime rate; therefore, the rates typically change according to the Federal Reserve, plus a margin," Kroon says. "They can change very quickly."

Conversely, home equity loans let you keep your rate and payment for the long haul. At a time when gas prices, inflation and other economic factors are volatile, that can add some much-needed stability for consumers.

"A fixed-rate product can make budgeting easier," says Jose Pascual, head of mortgage and commercial banking at PSECU. "You know your rate and payment from the beginning, which can be helpful when other household costs are already putting pressure on monthly budgets."

A home equity loan can also help you avoid the temptation to overspend. Since HELOCs offer extended access to cash for a long period, it can often cause borrowers to withdraw more than they actually need to. A home equity loan keeps you to one set amount — and you can never withdraw or borrow more without taking out a new loan. 

"HELOCs can be dangerous for people who like to spend money," Kroon says. 

What alternatives should homeowners consider?

Cash-out refinancing is an alternative to home equity loans and HELOCs. With a cash-out refi, you refinance your mortgage loan and take out a loan that's larger than your current mortgage. The funds are then used to pay off your old mortgage loan, and you receive the remaining loan funds. It's a strategy that lets you tap your home equity without adding an extra loan or payment to your household. 

This is typically only a good idea if your refinanced mortgage loan has a similar or lower rate than your new one, though. Otherwise, it will likely result in higher short- and  long-term costs. If you're not able to secure a better rate, a home equity loan or HELOC may be the way to go. 

Some lenders also offer HELOCs that come with fixed-rate options, which could be a good middle ground between the two options.

"These allow customers to lock eligible HELOC draws into a fixed rate for a selected repayment term," Erebia says. "They can have the flexibility of accessing their equity as needs arise, while also having the option to create more certainty around repayment."

The bottom line

Whichever route you choose, experts say to make sure to keep your financial goals and budget at the forefront, and always shop around for your HELOC or home equity loan.

"With either option, look beyond the advertised rate," Pascual says. "Compare fees, repayment terms, and the monthly payment you'd be taking on. Most importantly, remember that your home secures the debt, so make sure you understand the commitment before you borrow."