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Is a home equity loan or HELOC better amid rising inflation?
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Inflation came in hot for the third month in a row in March. Prices were 3.5% higher in the month than they were one year earlier. Not only did this figure outpace the 3.4% inflation rate economists expected for the month, it’s up from February’s 3.2% inflation rate which was an uptick from the 3.1% price growth seen in January.
That could be bad news if you need to borrow money. After all, interest rates are already high and inflationary periods can lead to rate increases. So, the already high cost of borrowing money could climb even higher ahead.
Then again, there is still at least one relatively low-cost borrowing option to consider (when compared to other options). That is to borrow against your home equity. This option typically comes with competitive interest rates because these loans are secured by your home. And you could have quite a bit of it to borrow against. The average American homeowner has $299,000 worth of untapped equity (around $190,000 of which is accessible).
That said, there are multiple ways to access your equity. Two of the most popular ways are home equity loans and home equity lines of credit (HELOCs). But, which of these two options is better amid rising inflation?
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Is a home equity loan or HELOC better amid rising inflation?
The choice between a home equity loan and a HELOC typically boils down to two things:
- What type of interest rate you want: Home equity loans usually offer fixed interest rates while HELOCs can come with variable interest rates.
- How you want to access your equity: Home equity loans offer funding in one lump sum while HELOCs act as revolving lines of credit – giving you access to your equity when you need it through the HELOC’s draw period (typically the first five to 10 years of the loan) and up to a pre-set credit limit.
So, which of these options is better in today’s inflationary environment?
“HELOCs offer a lot of flexibility, but one of the concerns with a HELOC is that it has a variable interest rate and it’s typically tied to the federal funds rate,” says Darren Tooley, senior loan officer at the wealth management firm Cornerstone Financial Services. And that can be a real concern in today’s inflationary environment.
“In response to higher inflation, the Fed will typically respond by increasing the federal funds rate,” says Tooley, which can lead to higher variable HELOC interest rates. “This is why in times of higher inflation, a fixed rate home equity loan is usually the better option.”
“With rising inflation, we can assume interest rates will remain the same or in fact, rise,” explains Mark Charnet, founder and CEO of the financial planning firm, American Prosperity Group. “It is therefore logical to assume that the home equity loan with a fixed interest rate for the life of the loan would be a superior way to access your home equity.”
Take out a home equity loan now for fixed, predictable payments.
Why you should consider a home equity loan now
If you need access to money to cover a relatively large expense, a home equity loan may be better than other popular financing options. Here’s why:
- Personal loans: While home equity loans and personal loans are typically both fixed-interest products, interest rates on home equity loans (averaging between 8.70% and 8.73%) are typically lower than those on personal loans (averaging 12.18%). You may also be able to access more funding with a home equity loan than you can with a personal loan.
- Credit cards: Home equity loans typically come with significantly lower interest rates than credit cards (with credit card interest rates averaging over 20%). While home equity loans generally come with fixed interest, the interest rates on credit card accounts are typically variable – which may lead to increasing payments in an inflationary environment. Home equity loans will also likely give you access to a larger amount of funding than credit cards.
- Cash-out refinancing: A cash-out refinance gives you access to your equity while refinancing your first mortgage at today’s interest rates, which may not be ideal in today’s high interest rate environment. That is, unless you recently purchased your home when mortgage rates were peaking and your current mortgage rate is higher than the rates you can get today.
Tap into the advantages of a home equity loan now.
The bottom line
When comparing a home equity loan to a HELOC amid rising inflation, the experts we spoke to seem to lean toward the fixed-rate home equity loan as the better option. That’s because inflationary periods may lead to higher interest rates, which could push the monthly and long-term cost of a HELOC higher while the monthly and long-term cost of a home equity loan are usually fixed.
A home equity loan may be better than other popular financing options, too. You’ll probably be able to access more funding at a better rate with a home equity loan when compared to a credit card or personal loan. And, home equity loans don’t change your first mortgage – as is the case with a cash-out refinance.
So, if you have a significant financial need, consider taking out a home equity loan today.
The following is a transcript of an interview with Sen. Mark Kelly, Democrat of Arizona, on “Face the Nation with Margaret Brennan” that aired on Oct. 6, 2024.
MARGARET BRENNAN: Joining us now is Arizona’s Democratic Senator, Mark Kelly. He’s in Detroit this morning on the campaign trail for the Harris campaign. Good morning to you, Senator.
SEN. MARK KELLY: Good morning, Margaret.
MARGARET BRENNAN: I want to talk to you about Arizona, but let’s start in Michigan, which is where you are right now. And it is going to be such a key state to a potential Harris or Trump victory. Vice President Harris is facing challenges among black men, working class people, as well as the Muslim and Arab populations skeptical of the White House support for Israel’s wars. What are you hearing on the ground there from voters?
SEN. KELLY: Well, my wife, Gabby Giffords, and I have been out here for a couple days. We’ve been campaigning across the country, Michigan, I’ve been in North Carolina, Georgia as well. I’ll be back to Arizona here soon. The vice president was out here speaking to Muslim organizations and the Arab community about what is at stake in this election and addressing the concerns that they have. What we’re hearing, issues about the economy, about gun violence, about, you know, supporting American families and the difference between Donald Trump and Kamala Harris. You know, Kamala Harris, who has a vision for the future of this country, Donald Trump, who just wants to drag us backwards.
MARGARET BRENNAN: Today in Dearborn, Michigan, there’s a funeral service for an American man who was killed in Lebanon by an Israeli airstrike. It just underscores how that community you’re talking about out in Michigan feel some of what’s happening in a personal way to their community. Given how close this race is, do you think this war and the expectation it could escalate could cost Democrats both a seat in the Senate and potentially the presidency?
SEN. KELLY: Margaret, nobody wants to see escalation and it’s tragic when any innocent person, whether it’s an American or Palestinian, lose their life in a conflict. Tomorrow’s one year since October 7th, when Israel was violently attacked. Israel has a right to defend itself, not only from Hamas, but from Hezbollah and from the Iranians. But, you know, I and my wife, you know, we feel for the community here who’s been affected by this. And that’s why the vice president was out here earlier, a few days ago, meeting with that community.
MARGARET BRENNAN: But it’s a live issue.
SEN. KELLY: Yeah, sure. I mean, there is an ongoing conflict in the Middle East. Israel is, you know, fighting a war now on, I think it’s fair to say, two fronts and then being attacked by the Iranians as well. And, they- they need to defend themselves, and we need to support our Israeli ally. At the same time, when women and children lose their life, innocent people in a conflict, it is- it is tragic.
MARGARET BRENNAN: You do sit on the Senate Intelligence Committee and so I know you know how intense the efforts are by foreign actors to try to manipulate voters going into November. Just this Friday, Matthew Olsen, the lead on election threats at the Department of Justice, told CBS the Russians are, quote, highlighting immigration as a wedge issue. That is such a key issue in Arizona. Are you seeing targeted information operations really focusing in on Arizonans right now?
SEN. KELLY: Not only in Arizona, in other battleground states. It’s the Russians, the Chinese, the Iranians, and it’s significant. And we need to do a better job getting the message out to the American people that there is a huge amount of misinformation. If you’re looking at stuff on Twitter, on TikTok, on Facebook, on Instagram, and it’s political in nature, and you may- might think that that person responding to that political article or who made that meme up is an American. It could be- it could look like a U.S. service member. There is a very reasonable chance I would put it in the 20 to 30% range, that the content you are seeing, the comments you are seeing, are coming from one of those three countries: Russia, Iran, China. We had a hearing recently, with the FBI director, the DNI, and the head of the National Security Agency. And we talked about this. And we talked about getting the word out. And it’s up to us, so thank you for asking me the question, because it’s up to us, the people who serve in Congress and the White House to get the information out there, that there is a tremendous amount of misinformation in this election, and it’s not going to stop on November 5th.
MARGARET BRENNAN: Understood. And we will do our best to help parse that for viewers. But on the topic of the border, President Biden did announce just this past week new regulations to keep in place that partial asylum ban that he rolled out back in June. That’s what’s credited with helping to bring down some of the border crossing numbers in recent weeks. It was supposed to be a temporary policy, dependent on how many people were crossing at a time. Do you think this is the right long term policy, or is this just a gimmick to bring down numbers ahead of the election?
SEN. KELLY: Well, the right long term policy is to do this through legislation. And we were a day or two away from doing that, passing strong border security legislation supported by the vice president, negotiated by the vice president, and the president and his Department of Homeland Security, with Democrats and Republicans–
MARGARET BRENNAN: But this is not legislation.
SEN. KELLY: –This is bipartisan. This isn’t. But the legislation was killed by Donald Trump. We were really close to getting it passed. That’s the correct way to do this. When you can’t do that, Margaret, when a former president interrupts the legislative process the way he did, which is the most hypocritical thing I’ve ever seen in my three and a half years in the Senate. After that happened, the only other option is executive actions. And this has gone from what was chaos and a crisis at our southern border to somewhat manageable. And if you’re the border- Border Patrol, you know, this is this- you need this. I mean, otherwise it is unsafe for Border Patrol agents, for CBP officers, for migrants, for communities in southern Arizona. So it’s unfortunate that this was the- these were the steps that had to be taken.
MARGARET BRENNAN: Okay.
SEN. KELLY: But that’s because the former president didn’t allow us to do this through legislation.
MARGARET BRENNAN: Senator, we have to leave it right there. Face the Nation will be right back.
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Sen. Mark Kelly says Americans need to know about “huge amount of misinformation” on election
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