Will a home equity loan or HELOC be better this January?

The economy shifted during the final months of 2024 — the Federal Reserve cut interest rates, reducing the target rate to a range between 4.25% and 4.50%. And unemployment remains low at 4.1%. Inflation has dropped from a decades-high of 9.1% in 2022, but still remains above the Fed's 2% goal. And it has ticked back up slightly in recent months, causing the Fed to re-evaluate how many times it expects to cut interest rates in 2025. 

These changes will likely continue to impact the rate landscape and could greatly impact home equity borrowing options. If you're hoping to access your home equity soon, it's important to understand which borrowing option makes the most sense for your situation. 

A home equity loan and a home equity line of credit (HELOC) are both viable alternatives. To understand what's the best choice for homeowners in January and later this year, we asked three financial experts to weigh in.  

See how much home equity you're eligible to borrow here now.

Will a home equity loan or HELOC be better this January?

Not sure which of these options will be preferable this month? Here's what to consider for both:

The case for a home equity loan

A home equity loan is similar to a traditional loan, but it's secured using the equity in your home as collateral. Borrowers will receive a single, lump sum payment and will repay the loan in monthly installments.  

Home equity loan interest rates are fixed, so your monthly payments will be identical and easy to budget for. Home equity loans rates tend to be low, and if you use the money to make improvements on your home, the interest payments may be tax-deductible. 

"A home equity loan is best for borrowers who need to cover a huge one-time expense, say debt consolidation or a major purchase," says Mark Damsgaard, founder of Global Residence Index. "This type of loan usually has fixed rates, so there's stability if interest rate trends are uncertain."

See what home equity loan interest you could qualify for here.

The case for a HELOC

"With mortgage rates remaining higher than what many consumers consider normal, renovating or leveraging home equity may be a smart move," says Denya Macaluso, vice president of residential lending at MSU Federal Credit Union. "A home equity line of credit can be beneficial because large expenses like weddings or vacations would be costlier if financed through credit cards."

When you qualify for a HELOC, you'll receive a credit line you can draw from on an ongoing basis. A HELOC comes with variable interest rates, so they'll change depending on what happens in the market.

The borrowing period can last 10 years and during that time you can draw from the funds as you need them, and you'll only pay interest on the money you borrow. Once the borrowing period is up, you'll enter the repayment period, which typically lasts 10 to 20 years. 

According to Damsgaard, a HELOC is best for borrowers who prioritize flexibility and expect to have ongoing expenses over time. "A HELOC makes sense for them because of the variable rates. If interest rates drop further, borrowers could expect lower payments," he noted.

The bottom line

Both a HELOC and a home equity loan can be good ways to access your home equity this January, depending on your goals and financial situation.

"With federal rates expected to drop by 50 basis points in 2025, HELOCs may prove more cost-effective as rates decrease," notes Macaluso. "Hybrid loans offering both a credit line and the ability to lock in segments provide flexibility for borrowers to adapt to market changes." Ultimately, however, the choice will come to your personal financial situation and borrowing preferences, both this month and in the months ahead.