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

For Americans needing extra cash amid high inflation and rising prices, home equity lines of credit (HELOCs) and home equity loans present alternatives to costly credit cards. These options generally offer lower interest rates and higher borrowing limits, suitable for various purposes.

The primary distinction lies in how funds are accessed. A home equity loan provides a one-time lump sum, while a HELOC functions as a revolving line of credit, typically available for 10 years. This flexibility allows homeowners to draw funds as needed, paying interest only on the amount borrowed.

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It's a revolving line. You can access funds as you need them and only pay interest on what you've drawn.

HELOCs can be advantageous in the current market, with average rates around 7%. "It's a revolving line," says Amanda Erebia, executive vice president at Amegy Bank. "You can access funds as you need them and only pay interest on what you've drawn."

Conversely, home equity loans offer the security of a fixed interest rate for the entire loan term, which can range from five to 30 years. This protects borrowers from potential rate hikes, unlike most HELOCs which have variable rates. "Rates between the two are very close, but HELOC rates are just slightly lower in most instances," notes Matt Kroon, a home loan specialist at Churchill Mortgage.

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Rates between the two are very close, but HELOC rates are just slightly lower in most instances.