HELOCs vs. home equity loans: Which borrowing option is more affordable now?

For most consumers, borrowing money right now is expensive. Credit cards come with double-digit rates (over 21%), and personal loans are pricy, too, averaging over 12% right now. If you’re a homeowner, though, you have access to a lower-cost option: home equity products.

With home equity loans and home equity lines of credit (HELOCs) you can snag rates under 9%. Despite their affordability, though, the two products aren’t one and the same. In fact, both vary slightly in how their rates, upfront fees, and long-term costs work, so it’s important to weigh your options before jumping in. 

Are you considering a home equity loan or HELOC now? Then it’s important to understand what’s more affordable now and what’s likely to be more affordable in the future. We asked some experts to discuss how the costs measure up.

See what home equity loan and HELOC rates you’d qualify for here.

HELOCs vs. home equity loans: Which borrowing option is more affordable now?

Traditionally, a home equity loan will have a lower rate than a HELOC. 

As John Aguirre, a mortgage originator at Loantown, explains, “Equity loans typically carry lower interest rates than equity lines of credit primarily because an equity loan is an installment loan. An equity line operates as a revolving credit line, similar to a credit card. It’s primarily due to the risk factor involved with the two different types of products.”

Right now, though, conditions are a little different. HELOC rates are actually lower than those on most home equity loans, which can save you money — at least upfront — on your monthly payments.

“Some institutions are offering lower introductory rates in anticipation of the Fed lowering the Fed funds rate,” says Evan Luchaco, a home loan specialist at Churchill Mortgage.

Currently, new HELOCs are averaging just 7.94%. Home equity loans, on the other hand, have rates in the mid-8% range. Just be warned that these conditions might not last long, Luchaco says.

“Based on the most recent comments by Federal Reserve Chair Jerome Powell about keeping rates steady until the markets settle … the anticipation of the Fed lowering the funds rate is more unpredictable,” he says.

See how low of a HELOC rate you’d qualify for here.

Which has lower upfront costs?

If you’re simply looking at the upfront costs of tapping your home equity, the decision is often a wash. As Aguirre puts it, “In my experience, equity lines and equity loans are typically going to carry the same upfront cost — mainly because they’re going to go through a similar underwriting process.”

It really depends on where you get your loan and your financial profile, though. Some lenders will waive closing costs on all HELOCs, for example. Others might be more willing to do so if you have a higher credit score or present a low risk of non-payment.

“Depending upon your credit score, debt-to-income ratio, the percentage of equity that you want to collateralize, the direction of interest rates and the state of the economy, the affordability of HELOCs or home equity loans will vary upon circumstance,” says Bruce Maginn, a financial advisor at Solomon Financial. “It’s vital to shop and compare not only the rates, but the costs, and negotiate these rates as low as possible. Good to excellent credit scores and a stable income history go a long way in your ability to negotiate with lenders.”

Which costs more in the long run?

Though HELOCs have lower rates right now, they won’t always be. They also usually have rates that are variable, meaning that they’ll rise or fall over time, usually on a monthly basis for borrowers.

As Maginn explains, “HELOCs frequently start off at a lower interest rate than the fixed rate of the home equity loan. However, as conditions change and the prime rate increases, the HELOC can quickly exceed the fixed nature of the home equity loan rate.”

With many HELOCs, you can make interest-only payments for the first 10 years of the credit line — called the draw period. Because of this, HELOCs can also add up to more in long-term interest costs, because you often won’t start paying down the principal balance for many years, allowing for more interest to accrue than would have on a home equity loan.

Learn more about your potential home equity borrowing costs here.