As inflation eases in 2025 and the Federal Reserve keeps rates paused, the economic landscape has brought welcome news for homeowners: declining interest rates on home equity loans and home equity lines of credit (HELOCs). This comes at an opportune time for utilizing home wealth, as the average American property owner has access to over $300,000 in equity, about $200,000 of which is tappable.

Though both home equity borrowing options use your home as collateral, each has distinct rates. HELOCs typically offer lower variable rates that change with economic conditions. In contrast, home equity loans feature higher, fixed rates that remain stable throughout the term. Understanding why these rate differences exist, though, can help you make informed borrowing decisions in today's favorable market.

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Why home equity loan and HELOC interest rates are different, according to experts

Below, lending professionals outline a few reasons why home equity loan and HELOC interest rates vary:

Fixed rates command a premium on home equity loans

You'll often see higher home equity loan interest rates because these products lock in your rate for the entire loan term. 

"This predictability comes at a premium because lenders assume the risk of future rate increases," says Steven Glick, director of mortgage sales at HomeAbroad, a real estate investment fintech company. 

With a fixed-rate loan, banks can't adjust rates even if market conditions change.

Conversely, HELOCs generally offer more competitive introductory rates due to their adjustable terms. Lenders can adjust rates upward when needed, reducing their long-term risk.

"[They're] sensitive to short-term interest rate changes, especially shifts in the prime rate," Joe Perveiler, senior vice president at PNC Bank, says.

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Flexible draw periods enable lower initial HELOC rates

Payment structure shapes the interest rates for both home equity borrowing options.

"HELOCs are often interest-only during the initial draw period (typically 10 years), followed by a 20-year amortizing repayment term," says Jeff DerGurahian, chief investment officer and head economist at mortgage lender loanDepot. "Home equity loans, by contrast, amortize from the beginning over 10 to 30 years."

When using a home equity loan, consumers get their approved funds in one disbursement. With HELOCs, though, lenders deploy funds as borrowers use their credit lines. 

"This flexibility lets [them] manage capital more dynamically, often resulting in lower initial rates to attract borrowers," Glick notes.

Lenders price ongoing borrowing risk into variable rate structures

"With a HELOC, borrowers can keep borrowing money over time, which means the loan balance [grows]," Glick says. "This becomes risky for lenders if home values fall or the borrower's finances change."

Lenders manage ongoing risk through variable rate structures that can adjust if conditions worsen. This flexibility allows them to offer lower initial rates to borrowers instead of charging higher fixed rates upfront.

Secondary market requirements drive higher fixed-rate loan pricing

The loan's journey after closing impacts your interest costs. Glick says that lenders frequently sell home equity loans to outside investors through securitization. These investors demand specific yields, forcing banks to set higher initial rates.

"With variable rates and uncertain draw patterns, [HELOCs are] harder to securitize," says Glick. Banks usually keep HELOCs on their balance sheets, setting rates based on internal costs and short-term market rates rather than investor demands. This generally results in lower starting rates for HELOC borrowers.

Advantages of home equity borrowing in today's economic climate

Despite their rate differences, both home equity products can beat other borrowing tools when used responsibly.

Here are a few key benefits, according to experts:

• Better interest rates: "In most cases, HELOCs and home equity loans carry [much] lower rates than credit cards or personal loans," explains DerGurahian. "[They're] smart options for consolidating high-interest debt or funding major expenses [such as] home renovations, education or medical bills."
• Higher borrowing limits: Home equity products let you tap up to 80% to 90% of your home's equity on average. This could amount to hundreds of thousands of dollars. Meanwhile, "credit cards and personal loans cap at $10,000 to $50,000, limiting their use for big expenses," Glick says.
• Flexible access: "A HELOC lets you borrow as needed — much like a credit card — and offers flexibility for ongoing expenses," Perveiler says. Unlike with a fixed loan, you pay interest only on what you use, making it cost-effective for phased projects.
• Potential tax benefits: According to Glick, those who finance home improvements with equity products may qualify for tax deductions on their interest payments.
• Longer repayment terms: Home equity loans and HELOCs offer repayment periods that span from five to 30 years. This creates lower monthly payments than credit cards or personal loans, which may require full repayment in one to seven years.

The bottom line

Home equity borrowing continues to offer valuable opportunities in today's economy. While rate differences between products reflect how lenders manage risk, your choice should depend on personal financial and borrowing goals.

Before applying, compare offerings from several reputable lenders. Ask about HELOC rate caps and total interest expenses for home equity loans. Consulting a mortgage professional can help you determine whether lower initial rates or long-term stability better suits your needs.