Homeowners can access two forms of credit that other consumers do not: home equity loans and home equity lines of credit (HELOC).
These lending products typically offer lower interest rates than credit cards or other loans but use the customer’s home as collateral.
Houses are the most valuable asset at the disposal of the average American, and HELOCs and home equity loans allow them to borrow money to fund home renovations and repairs.
Due to the low interest rates, those in a financial bind can also use HELOCs and loans to pay off unforeseen costs such as medical debt, consolidate personal debt, or even pay for college tuition.
However, since HELOCs use the home as collateral, homeowners risk foreclosure if they cannot repay the balance.
Home equity loans carry fixed interest rates, but HELOCs have adjustable rates, meaning the rates rise when the Fed raises the federal funds rate.
Though the Fed’s plan for interest rate cuts for 2025 isn’t set in stone, experts still predict a few rate cuts for this year. Homeowners may want to monitor interest rates and plan accordingly.
A family is shown looking at their new home. Tapping into the equity built through homeownership allows consumers to access lower interest rates on home equity loans and home equity lines of credit (HELOC).
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Lenders may offer more competitive HELOC rates
When the Fed revealed its first interest rate cut since 2020 last year, economists and financial experts predicted a slew of cuts through the end of 2025 to meet the Fed’s new target range for the federal funds rate.
However, as inflation began to creep toward 3% again, and political and economic uncertainty put upward pressure on mortgage rates, the Fed started to taper its bullish approach to interest rate cuts.
Home equity loans are fixed-rate products, meaning homeowners can get locked into a great deal if interest rates continue to drop. However, HELOCs utilize variable rates, meaning that borrowers will see their interest rates — and accrued interest — rise if interest rates are raised.
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Greg McBride, Chief Financial Analyst at Bankrate, shares his expectations for how home equity lending products will change throughout the year.
“In addition to the forecast of three Fed rate cuts for 2025, prospective borrowers should be on the lookout for new, competitive home equity line of credit (HELOC) offers — often with introductory rates — aimed at attracting equity-rich homeowners to borrow against it,” he wrote in a statement to TheStreet.
“American homeowners are sitting on a mountain of home equity, but aside from short-term HELOC introductory rates, borrowing against it in 2025 will still be pricey.”
McBride predicts that HELOCs will reach 7.25%, a level not seen since 2022. Though home equity loans are also falling, they will carry a higher rate at 7.9%.
Key differences between HELOCs and home equity loans
While HELOCs and home equity loans offer advantageous interest rates compared to other types of loans and credit cards, borrowers must ensure they can repay the balance. Both products use the homeowner’s house as collateral, meaning the lender can seize the home if it falls into delinquency.
The key difference between HELOCs and home equity loans is the amount you can borrow. HELOCs offer a revolving line of credit, meaning borrowers can continue to borrow money up to a specific limit, while equity loans are a one-time lump sum.
HELOCs also offer lower, variable interest rates, while home equity loans carry a fixed rate. While lower rates may be tempting, the monthly repayment amount could increase substantially if interest rates rise. However, the interest paid on HELOCs is tax-deductible, which could help lower homeowners’ tax bills.
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The average HELOC balance was $42,000 in 2023, and homeowners can borrow up to 80% of their home equity stake. This indicates they are better suited for large renovation projects or significant debt consolidation.
Home equity loans may be a more suitable option for more risk-averse borrowers. Though the average home equity loan interest rate was around 8.4% at the end of 2024, it will likely drop even further this year.
McBride warns that borrowers should assess home equity carefully.
“This is not the 2010s where rates were really low and you could justify revolving that balance because on an after-tax basis, it was costing you next to nothing,” he said. “That is not the case anymore. If you borrow it, you’ve got to have a game plan for how you’re going to pay it back because it’s costly debt now.”
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