Interest rates on borrowing products have surged in recent years thanks to the pandemic, inflation and multiple hikes to the federal funds rate. But the interest rate climate is evolving again, with recent reports showing a further cooling in the inflation rate (already dramatically lower than June 2022’s 9.1% rate). Inflation hovers just around 3% now and, if it continues to fall, the Federal Reserve could issue its first interest rate cut of 2024. 

So borrowers could soon see relief on everything from mortgages to student and personal loans.

Current homeowners in need of extra cash may also consider turning to their existing home equity. With a home equity loan or home equity line of credit (HELOC), owners can gain access to substantial sums of money, often at a much lower interest rate than many popular alternatives. But the interest rates on both products differ, with the average home equity loan rate at 8.60% as of July 10 and HELOCs sitting at 9.17%. And while home equity loans may, on paper, seem like the advantageous option, there’s a compelling argument for choosing the higher HELOC rate now, instead. Below, we’ll break down why.

Start by seeing what HELOC rate you could secure online today.

Why you should choose a higher HELOC rate over a home equity loan now

If you borrowed $50,000 worth of equity with a home equity loan, you’d pay $622.61 each month for 10 years. A HELOC would cost $637.99 monthly, or just over $15 more, during that same period. While that’s not ideal, especially when compounded annually and over the lifespan of the loan, a HELOC could still be worth pursuing now, even with the higher rate. Here’s why:

HELOC rates are variable

HELOC interest rates are variable and set to change, perhaps as often as monthly, depending on your lender and the terms agreed to. This means that rates could adjust upward or downward until you’ve paid back all that you borrowed. While this is a drawback in a climate in which rates are heading upward, it can be a benefit this summer and into 2025, particularly now, when the average homeowner has hundreds of thousands of dollars worth of equity to tap into.

See how much home equity you could use with a HELOC here.

HELOC rates could drop soon

While multiple cuts to the federal funds rate were anticipated this year, thus lowering the rates lenders offer to borrowers, it now appears likely that just one rate cut will be issued in 2024. But that could result in your HELOC dropping, perhaps significantly if the Federal Reserve issues a major cut. So while today’s HELOC rate may be higher than a home equity loan, it could be lower as the rate climate evolves. 

Home equity loans will need to be refinanced

An improved rate climate will undoubtedly benefit home equity loans, too. But if you took out a home equity loan in July and rates drop in September or October, you’ll need to refinance your home equity loan – and pay the costs of refinancing – to lock in that new, lower rate. Refinancing costs could add up quickly and may even negate any savings you can obtain with the lower rate. To avoid this scenario, then, a HELOC may be your better choice this July.

The bottom line

Borrowers looking for inexpensive ways to access money will need to evolve with the rate climate. For homeowners, this may involve substituting a home equity loan with a HELOC instead. Thanks to their variable rate, the likelihood of rate cuts to come and the added expense of having to refinance a home equity loan to secure the rate a HELOC would adjust to independently, now is a rare time when a higher rate HELOC may be better than a home equity loan. Just be sure to carefully crunch the numbers and consider the pros and cons of both products before acting, as you could jeopardize your homeownership if you fail to pay back all that you have borrowed.