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Borrow from your equity can be a wise way to improve your financial health, especially in today’s economy. For example, you can use the equity in your home to finance home renovations that can improve the value of your home. In the same way, Home equity loans and home equity lines of credit (HELOCs) typically offer lower rates than credit cards and other types of loan products, making them a useful option for consolidating debt and reducing interest costs. And because Americans currently have an average of $319,000 in home equity, these loans can offer higher borrowing limits than other options.
Current economic factors, including inflation and interest rates, also bode well for borrowers right now, making it an even better time to consider these types of loans. For starters, the Federal Reserve has plenty of confidence in the downward trend in inflation to lower the federal funds rate during the last three Fed meetings. Although the Fed does not set mortgage rates, the federal funds rate influences the interest rates lenders charge on their lending products. Although not yet at pre-pandemic levels, interest rates on home loans and HELOCs are slowly improving. The average interest on home ownership loans currently stands at 8.41%, while this is the average HELOC interest rate amounts to 8.52% (as of December 19, 2024).
Yet the only economic constant is change. Inflation rose slightly in Octoberand other factors could change the credit environment in the future. With that in mind, the choice between a HELOC loan and a mortgage loan will depend on your financial goals and how these products respond to changes in the market. Let’s see which of these two equity options might make sense for your situation.
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Why a HELOC could be better than a mortgage loan in 2025
HELOCs work like credit cards and provide a line of credit that can be borrowed multiple times (up to the credit limit). This type of home equity loan can be a useful option if you want to use the money over time as needed, rather than getting one large payment like you would with a home equity loan. For example, if you’re renovating your home with multiple projects, a HELOC can help you access the funds you need for each phase so you don’t have to borrow more than you need upfront.
Keep in mind that HELOC repayment terms usually start with interest-only payments for a set number of years, typically five or 10 years.
“This is for someone who wants a low monthly starting amount, but keep in mind that you may not pay the entire principal amount,” says Adam Spigelman, senior vice president at Planet Home Lending. “If you borrow $50,000 and pay only interest for five years, you will still owe $50,000 at the end of the five years.”
Keep that in mind too HELOCs have variable rates that are tied to an index such as the prime rate, which is typically about 3% higher than the federal funds rate. So if you expect the Fed’s rate cuts to continue, a HELOC could save you money in the short term. On the other hand, you might think twice about getting a HELOC if you think rates will increase during your repayment term.
“If that index number rises, your monthly payment could rise too. That higher payment could leave you with less money in your pocket, which could make it harder to stay out of debt. If the higher interest rate comes at a time when you’re If we start paying back principal, it could lead to a payment shock,” Spigelman notes.
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Why a Home Loan Could Be Better Than a HELOC in 2025
If you’re looking for more predictable financing, you may prefer one equity loan because of the fixed interest rate and the monthly payment that remains the same throughout the life of the loan regardless rate adjustments.
“A home loan has a fixed interest rate and does not fluctuate based on what the Federal Reserve does,” says Jeremy Schachter, branch manager at Fairway Independent Mortgage Corp. “So if interest rates fall, your fixed interest rate will not go down. down.”
While the Fed’s continued rate cuts could lower borrowing costs for HELOCs through 2025, a mortgage loan could be a better option in the longer term if you expect rates to rise over the life of your loan.
Home equity loans are a good option if you need a large, one-time payment to finance major expenses. You can use one to finance a major home renovation, consolidate high-interest debt, or even… reimburse your child’s tuition fees. Because home equity loans often have lower rates than private student loans, they can help you save money in the long run.
Should you borrow from your home equity now or wait?
The decision whether to borrow now or wait until 2025 or later depends on your financial situation, goals and borrowing preferences. As Schachter explains, the type of loan you choose matters because fixed and variable rate options affect how your monthly payments change over time.
Depending on your needs and goals with the money for the loan, it may make sense not to wait to get a HELOC because it changes as interest rates change. If you’re looking for a home equity loan, you can it makes sense to postpone until next year if your projects or use of the funds can be postponed,” says Schachter.
The bottom line
On the way to 2025, the choice will be between a mortgage loan and a HELOC comes down to how stable you want your payments to be, and which direction you expect interest rates to move. So take some time to weigh the pros and cons of each option and how they might impact your budget. Finally, keep in mind that mortgage loans and lines of credit are secured by your home, so you should never borrow more than you need, and make sure the payments fit comfortably into your budget before you sign for it.
