HELOC vs. Home Equity Loan: Which Move Makes the Most Sense as Rates Fall?

After years of rapid home price appreciation and historically low interest rates, nearly 50 million mortgage holders are now sitting on a mountain of tappable home equity.

The average homeowner has $212,000 in equity, according to recent research from ICE Mortgage Technology. And with the Federal Reserve signaling rate cuts that would make borrowing against it cheaper, and broader economic uncertainty in the immediate forecast, unlocking that housing wealth is looking more enticing than ever.

Financial experts say there may be a window of opportunity ahead, but access could narrow as lenders tighten loan-to-value ratios and reevaluate risk. That means that even if borrowing gets cheaper, it may also get harder.

So what’s the smarter move in today’s market: A HELOC, with its flexible, draw-as-you-go structure and variable rate? Or a home equity loan, with the predictability of fixed payments and long-term stability?

Here’s how the two products stack up and how to choose the right strategy for your goals.

Falling rates could make equity borrowing cheaper—but not for everyone

While borrowing may get cheaper in the short term, not every product or borrower stands to benefit equally.

“Falling rates create an attractive entry point for HELOCs, but borrowers need to understand how variable rates work,” says Michael Gaines, senior vice president of Capital Markets at Cardinal Financial.

A HELOC, or home equity line of credit, typically comes with a variable interest rate, making it uniquely positioned to become more affordable if the Fed follows through on cuts. That flexibility makes it ideal for borrowers who plan to draw funds gradually or in stages.

A home equity loan, on the other hand, locks in a fixed rate, offering stability and predictability, but less immediate upside from future potential rate reductions. Even so, it may be better suited for homeowners looking to borrow a lump sum for one-time expenses like renovations or debt consolidation.

But timing matters, warns financial expert Sajal Bhadra. 

“While borrowing is going to cost less soon, being able to unlock that equity might become more difficult,” he says. “Lenders are starting to reduce loan-to-value ratios in anticipation of slacker home prices, even as the Fed is poised to reduce rates.”

In other words, even as rates fall, lenders may reduce how much equity you can access, making it riskier to wait if you know you’ll need cash soon.

HELOC: Ideal if you want flexibility or plan to borrow gradually

A HELOC is almost exactly what it sounds like: a secured line of credit backed by your home’s value. When applying, you’ll be approved for a maximum credit limit, but you don’t have to use it all at once, or even at all. Instead, you can borrow as you need and pay interest only on what you actually draw—not the full line.

“A HELOC comes in handy when you need flexibility in your spending,” says Phil Green, CEO of I Buy SD. “Essentially, this is a revolving line of credit, and you may be able to borrow as you need. Then, you will pay the interest only on what you actually use.”

That flexibility makes HELOC an attractive option for the following:

• Staged home renovations (e.g., remodeling in phases)
• Tuition payments or medical bills spread over time
• Emergency liquidity (for example, in the event of a job loss) to draw on later as interest rates drop

That flexibility has some borrowers even taking out HELOCs as a precautionary hedge against future rate cuts and economic uncertainty, says Bhadra.

“The better borrowers are using HELOCs as rate hedges—taking out a line of credit today, opening themselves up and supporting it, and drawing down later when the variable rate falls following the cut,” he says.

But a HELOC isn’t without risk. Its variable interest rates can rise unexpectedly, increasing monthly payments and pushing them out of your planned budget. And because funds are easily accessible, some homeowners fall into the trap of over-borrowing or treating equity like free money—a dangerous move in a declining market or during financial instability.

Home equity loan: A fixed-rate option for one-time needs

If you know exactly how much you need to borrow—and want the peace of mind that comes with stable monthly payments—a home equity loan may be the better choice. This loan provides a lump sum at a fixed interest rate, with predictable repayment terms over a set period.

A home equity loan "is perfect for those single-time expenses like debt consolidation or home renovations," says Green. Unlike a HELOC, there’s no guesswork about future payments or rate fluctuations—what you borrow today, you’ll repay on a fixed schedule.

That makes a home equity loan especially useful for the following situations:

• Paying off high-interest credit card or personal loan debt
• Funding a large, one-time renovation or home upgrade
• Preferring predictability over flexibility in your monthly budget

There’s even some room for flexibility with this loan. Gaines notes that many lenders now help borrowers pair smaller home equity loans with other affordability tools like buydowns to keep borrowing costs low while maintaining long-term stability.

“The smartest approach is one that layers solutions—so borrowers gain flexibility and stability at the same time. That’s how equity becomes a true long-term advantage,” he says.

For homeowners seeking control, clarity, and simplicity, a home equity loan offers a no-surprises approach, particularly when rates are still elevated and you want to lock in costs before markets shift.

The 'hybrid' strategy savvy borrowers use

For those who want stability now and flexibility later, a hybrid approach can offer the best of both worlds, says Bhadra.

“The best strategy might be hybridizing: Borrow a small home equity loan to hedge some of your funding, and establish a HELOC for readiness down the line,” he explains. 

Think of it like this: Maybe you have high-interest debt that you want to knock out because you’re concerned about job stability in the coming months. In this case, you can take a home equity loan to pay off your high-interest debt, and lock in today’s fixed rates. For that future unpredictability, you can secure a home equity line of credit, keeping the door open to draw additional funds when rates fall or you need the flexibility.

Common mistakes and myths

But for all their opportunity, home equity loan products don’t come without risk.

“The biggest mistake I see is homeowners treating equity like free money,” says Green. “Whether you go for a HELOC or a loan, you are borrowing against your biggest asset: your home.”

It’s an important point. While home equity is largely touted as money in homeowners’ pockets, the only way to access it without strings attached is to sell the property. And with the housing market stuck in a rut, understanding the common misconceptions about tapping into home equity while still owning is more important than ever.

Myth No. 1: 'My equity will rebuild as home values rise'

Not always.

“Too many consumers think more worth in a home somehow replenishes equity,” says Bhadra. “But market fluctuations or refinancing charges can erase that buffer overnight.” 

Rising values don’t guarantee a smooth path back to equity, especially if prices stall or dip. Remember that whatever money you take out of your home’s equity is money that you’ll have to pay back: either out of your paycheck or from home sale proceeds.

Myth No. 2: 'Variable rates will drop immediately after a Fed cut'

HELOC borrowers often assume their interest rate will fall in lockstep with the Fed—but it’s more complicated. Rate changes depend on your lender’s margin and how quickly they adjust spreads. 

“Some borrowers fail to see that rate declines [don’t happen] overnight,” says Bhadra. “Lenders will decrease margins or index spreads that won't advantage customers overnight.”

Myth No. 3: 'Locking in now means I’ll miss out if rates fall'

Not necessarily. With hybrid strategies gaining popularity, locking in a smaller fixed loan while keeping a HELOC open gives you both certainty and future access. 

As Bhadra puts it: “The better approach is to watch for timing and incentive, not react to headlines about rates.”

Above all else, borrow with purpose

Tapping into your home equity can be a powerful tool to help secure your financial security, but only when it’s done with intention. If not, borrowers risk over-extending and jeopardizing the literal roof over their heads.

With nearly 25% of homeowners planning to tap into their equity in the next year, according to a recent ICE Borrower Insights Survey, it’s more important than ever to know how to borrow for the right reasons. Smart equity use can build long-term wealth. The key is making sure every dollar borrowed has a job to do.