Is a HELOC or home equity loan better for borrowers now?
Summary
Homeowners today can choose between two main ways to borrow against their home’s value: a home equity line of credit (HELOC) or a home equity loan. HELOCs offer flexible access to money with usually lower interest rates but variable rates, while home equity loans provide a fixed amount with a steady interest rate that won’t change over time.Key Facts
- HELOCs let borrowers access a credit line over about 10 years and only pay interest on the money they use.
- The average interest rate for HELOCs is around 7%, which is about 1% lower than home equity loans right now.
- Home equity loans give a one-time lump sum with a fixed interest rate lasting 5 to 30 years.
- Fixed rates on home equity loans protect borrowers from interest rate increases.
- HELOC rates can rise or fall because they change with the Federal Reserve’s prime rate plus a margin.
- Experts say home equity loans are better when interest rates are rising, while HELOCs are better when rates are stable or falling.
- HELOCs may tempt borrowers to withdraw more money than needed, while home equity loans limit borrowing to a set amount.
- Knowing your fixed payment with a home equity loan can help with budgeting when other costs are unstable.
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