3 Reasons to Choose a Home Equity Loan Over a HELOC in 2023

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  • Many property owners have a lot of home equity due to elevated home values.
  • You have different options for tapping your home equity, but there's one that may be most beneficial.
  • A home equity loan comes with predictable monthly payments, and can help you avoid the temptation to borrow more than you need.

A home equity loan could end up being a much better option.

Ever since mid-2020, many would-be buyers have been struggling to purchase homes. And a big reason has to do with elevated prices.

But while higher home values aren't a good thing when you're trying to purchase a home, they're a great thing when you own a home and decide you want to borrow against it. In fact, you have a few different options when it comes to borrowing against your home equity. You could opt for a home equity loan, or take out a home equity line of credit (HELOC). But in 2023, you may want to specifically favor the former. Here's why.

1. You'll get a fixed interest rate

As is the case with a personal loan, a home equity loan gives you a fixed interest rate on the sum of money you're borrowing. A HELOC, on the other hand, generally has variable interest.

That's a big deal right now, because interest rates have been soaring on the heels of Federal Reserve rate hikes. And also, we don't know if the Fed is done raising interest rates. There's a chance it will continue to employ that practice in 2023 until the rate of inflation comes down substantially. So at a time like this, you're really better off locking in a fixed-rate loan, as opposed to taking the chance of your interest rate climbing.

2. You'll have predictable monthly payments

The fact that home equity loans come with fixed interest rates means that you might have a much easier time working your loan payments into your budget. That's because they won't change over time like HELOC payments could. And at a time when inflation is still soaring and forcing a lot of people to pinch pennies, that consistency is essential.

3. You can avoid the temptation to overborrow

When you get approved for a HELOC, you gain access to a line of credit you can tap during a predetermined period of time -- often, five to 10 years. But that can open the door to temptation.

Let's say you're doing a home renovation project and take out a $20,000 HELOC to finance it. Your costs might only total $16,000, so in that case, you wouldn't need to borrow $4,000 of that $20,000. But you might then be tempted to tap that remaining $4,000 to do something like take a vacation since you have the option.

With a home equity loan, you're committing to a single borrowing amount from the start. And so you may be more likely to borrow more judiciously in that scenario, thereby lowering the total amount of debt you take on.

Both home equity loans and HELOCs are a viable borrowing option for a lot of people these days due to higher home values. But opting for a home equity loan could end up being the much better financial choice at a time when borrowing rates are high and money is tight for a lot of people due to our challenging economic climate.

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