Is a HELOC or home equity loan better this fall? What experts say

Persistent inflation weighing on the economy is cooling significantly. The latest Consumer Price Index (CPI) report showed that the average inflation rate is below 3% for the first time since early 2021.

Given the falling inflation, economists generally expect the Federal Reserve to lower the key interest rate, the rate at which banks lend money to each other, possibly as early as September. In return, the cost of borrowing for Home equity loans and home equity lines of credit (HELOCs) are beginning to fall and could continue to fall.

If you’re considering accessing the equity in your home, it makes sense to consider whether a HELOC or home equity loan is the better option for you, especially in this changing interest rate environment. We asked some experts what they recommend for the fall.

First, take a look at what interest rate you could secure for your home loan here now.

Is a HELOC or home equity loan better this fall?

As several experts are quick to point out, HELOC have variable interest rates which are traditionally tied to the prime rate, allowing you to benefit from falling rates. In contrast, a home equity loan has a fixed interest rate, meaning you could miss out on lower rates if they fall. “In this environment, I would recommend most clients opt for a HELOC instead of a fixed-term home equity loan so they can ride out the downside and not have to refinance debt later,” says JR Younathan, senior vice president and CA State Mortgage Production Manager at California Bank & Trust.

A HELOC could also benefit borrowers who may not need immediate access to the funds. “If a borrower wants access to some of their equity but isn’t sure when they’ll use it, a HELOC might be the better loan program,” says Neil Christiansen, branch manager and certified mortgage counselor at Churchill Mortgage. “You should see a reduction in interest costs if the Fed cuts rates over the next 12 to 24 months.” Of course, falling rates aren’t guaranteed, although economists generally expect the Federal Reserve to cut the benchmark interest rate when it meets again on Sept. 17 and 18.

Remember that your financial situation is unique and your choices should be tailored to your circumstances and goals. Even if interest rates go down, you may be more secure with a home equity loan if you value the predictability of a fixed rate. A fixed rate can also benefit you if interest rates reverse and go up.

As Younathan points out, Cash-out refinancinga less common choice in recent years as homeowners hold on to the low mortgage rates they received during the pandemic, could still be favorable for some. “But in cases where the interest rate on a first mortgage is lower than the current market rate, the (borrower) should have a blended rate analysis performed on the amount borrowed to determine what the true cost of the funds would be.”

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What is the interest rate forecast for home loans?

Deciding which type of home equity loan might be most beneficial for you may depend on whether you believe mortgage rates will fall as predicted, remain stable, or rise. The Federal Reserve does not set home equity loan interest rates, but they often rise and fall in line with the committee’s decisions regarding the federal funds rate.

“I think the general consensus is that they’re going to come down, but I think we need to keep a close eye on the labor market and consumer price index reports,” Younathan says. “Those seem to be the most observable metrics that the Fed is watching closely as it decides how much and how quickly it’s going to cut rates.”

Tai Christensen, co-founder and president of Arrive Home, a down payment assistance provider, expects interest rates to drop, although not as low as many borrowers hope. “I believe interest rates will continue to slowly decline over the next 12 months, but I don’t think they’ll drop to the historic lows we saw in 2020 and 2021,” Christensen says.

The conclusion

While interest rates are an important consideration for any borrower, there are other factors besides interest rates when deciding whether and what type of home equity product to purchase. For example, you should consider how much equity you have in your home, as banks and lenders often require 15% to 20% equity to be eligible. Remember, if you convert your home equity into cash, you’ll have less equity, which increases the risk that you’ll owe more on your home than it’s worth if property values ​​decline.

Your creditworthiness, including your credit-worthiness And Debt-to-income ratiois also a factor in the loan interest rate you qualify for. Finally, it is advisable to Compare offers from multiple lenders for home equity loans and HELOCs to find the best rates and terms available.