Is a HELOC or home equity loan better with interest rates on hold?

The federal funds rate will remain paused for at least a few more weeks. That was the unsurprising news on Wednesday when the Federal Reserve announced that it was keeping the rate frozen at a range between 4.25% and 4.50%. The pause was the third so far this year after the central bank cut rates three times in the final months of 2024. But if unemployment levels remain steady and inflation continues to decline (the April reading will be released on May 13), the bank could have enough motivation to resume its rate cut campaign when it meets again on June 17 and June 18.

So, what does the latest rate pause mean for prospective home equity borrowers? With the average home equity level over $300,000 right now, many may be exploring their home equity loan and home equity line of credit (HELOC) borrowing options. But, while similar, each product works differently, with unique pros and cons. In today’s rate climate, then, with interest rates on hold at least until June, which option is better for homeowners? That’s what we’ll break down below.

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Is a HELOC or home equity loan better with interest rates on hold?

In recent memory, a home equity loan was traditionally better to pursue with interest rates on hold. That’s because pauses in recent years came amid an elevated rate climate and, sometimes, before an additional Fed rate hike (and the Fed is a major driver behind home equity loan and HELOC rates). Homeowners could then protect themselves by pursuing a home equity loan since the product has a fixed rate versus a HELOC’s variable one. A variable interest rate is inherently risky when the rate trajectory is unknown or likely to increase again.

But is that the interest rate climate of May 2025? And will it be in June and July? It increasingly looks like it won’t be. While predicting the future of interest rates is inherently difficult to do with precision, and while any unforeseen economic developments could skew this path, the Fed is likely to issue a rate cut in either June or July. The CME Group’s FedWatch tool has a rate cut in June listed around a 30% likelihood, but that moves to around a 75% chance in July. And when that happens, HELOC rates will fall. Some lenders may even reduce their rate offers before any formal Fed rate cut action, as they don’t need to wait for a formal reduction to adjust rates. 

The immediate rate reality also supports choosing a HELOC over a home equity loan currently. The average HELOC interest rate is 7.95%, while home equity loan rate averages are as high as 8.51% for a 10-year loan. That half a percentage point difference, approximately, can lead to real savings over the traditional 10- or 15-year repayment period. And only HELOCs have dropped by more than two full percentage points, on average, since last September. Home equity loans have also declined in the last year or so, but at a slower pace and by smaller amounts. 

So, while in the interest rate climate of 2023 and 2024, when interest rates were on pause, a home equity loan was arguably better, that’s not the case now. Many borrowers would be better served by pursuing a HELOC today, presuming they have the flexibility to adjust their payments as the variable HELOC rate changes. If they can, they’d be hard-pressed to find a cheaper alternative than a HELOC now, which is not only the cheapest way to borrow home equity as of early May 2025, but it’s also one of the cheapest ways to borrow money overall as it has lower average rates than both personal loans and credit cards.

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The bottom line

In today’s evolving rate climate, a HELOC is arguably better (and less expensive) for homeowners. But this could always change, so borrowers should be strategic in their approach. If a HELOC rate spikes and payments become unaffordable, you could risk your homeownership if you can’t maintain your payment schedule. So closely compare both home equity loans and HELOCs before formally applying to ensure affordability both this May and in the months and years ahead.