Now that interest rates aren’t changing as much in 2025, homeowners are looking again at two popular ways to borrow money using the value they’ve built up in their homes: home equity lines of credit (HELOCs) and home equity loans.
Both allow you to utilize the equity in your house, which is the difference between the value of your house and the remaining mortgage balance. But how they work, how much they cost, and which one might be better for you can be quite different. Let’s figure out which one fits your financial plans this year.
Main Differences: How They Work and Their Rates
Home Equity Loan:
How It Works:
You get one big amount of money all at once and pay it back over a set period (usually 5 to 30 years) with an interest rate (the extra money you pay on top of what you borrowed) that stays the same. This predictable setup is good if you need a single large sum of cash for big expenses, like combining other debts or fixing up your house.
2025 Rates:
The average interest rates for these loans are expected to go down to 7.90%, which is lower than they were at their highest point in 2023.
HELOC (Home Equity Line of Credit):
How It Works:
This is like a credit card that uses your home’s equity. It has variable rates (the interest rate can go up or down over time). During a draw time, which is typically the first ten years, you can borrow money as needed, and after that, you have a period to repay the loan. This is useful for ongoing costs, like paying for education over several years or doing home renovations in stages.
2025 Rates:
HELOC rates are expected to average 7.25%, which would be the lowest they’ve been since 2022. As of April 30th, the average rate is at approximately 7.95%.
Good and Bad Points in 2025
Why Choose a HELOC?
- Lower Rates Right Now: HELOCs currently have interest rates that are up to 0.65% lower than home equity loans.
- Flexibility: Only when you truly need the money do you borrow it and pay interest on it. You can save money on interest by doing this.
- Rates Might Drop Further: Experts think HELOC rates could go even lower if the Federal Reserve (the central bank of the US) reduces rates later in 2025.
Why Choose a Home Equity Loan?
- Payments Stay the Same: You lock in today’s interest rate (around 7.90% on average) so your monthly payments won’t change, even if interest rates go up in the future.
- Simple to Understand: Because your payments are predictable, it’s easier to plan your budget if you need a large amount of money for one thing.
- Stable Over the Long Term: This is better for people who prefer knowing exactly what their payments will be and don’t want to risk having a variable interest rate.
Which One Fits Your Plans in 2025?
Choose a HELOC If:
- You need to access money at different times (like for a home renovation that happens in stages).
- You’re okay with your payments potentially changing and you think interest rates will go down.
- You want to take advantage of lower initial interest rates before the Federal Reserve might cut rates.
Choose a Home Equity Loan If:
- You prefer having the same interest rate and payment amount for a large, one-time expense.
- You want to lock in interest rates now to avoid them going up later, even though HELOC rates might decrease.
- You’re combining high-interest debts and need a set plan to pay them back.
Trends to Watch in 2025
- Changing Rates: HELOC rates will likely still be affected by what the Federal Reserve does with interest rates, while home equity loan rates are more stable.
- Help with Down Payments: Some lenders are starting to offer HELOCs along with grants to help first-time buyers, but this isn’t very common yet.
- Easier Online Access: Online companies like Upgrade and Rocket Mortgage now let you get pre-approved for a HELOC very quickly online.
Frequently Asked Questions
Q: Are HELOC rates guaranteed to go down more in 2025?
- A: While experts predict the average rate will be around 7.25%, this depends on whether the Federal Reserve actually lowers rates in the third or fourth quarter of 2025.
Q: Can I switch from a HELOC to a home equity loan later on?
- A: Yes, but the terms for switching can vary depending on the lender, and your interest rate might change when you switch.
Q: What’s the most I can borrow?
- A: The majority of lenders impose a cap on the total amount of debt you can have in relation to the value of your house. Often capped at 85%, this is known as the combined loan-to-value (CLTV). This implies that your mortgage balance plus your home equity loan, or HELOC, cannot exceed 85% of the value of your house.
Final Thoughts
In 2025, HELOCs are a good option for people who want flexibility and might benefit from lower interest rates in the short term, especially if rates do go down.
Home equity loans are a safer choice for those who value having predictable payments. Always compare offers from different lenders using websites like Bankrate or LendingTree, and talk to a financial advisor to make sure your choice fits your long-term financial plan.
