Will a HELOC or home equity loan be better in 2026? Lending experts weigh in

Home equity borrowing rates have been slowly falling over the last few months, dropping to an average of just under 8%, helping to ease the cost of tapping into your home’s equity. That has made home equity borrowing an option worth considering for a lot of homeowners, especially when you factor in that the average homeowner has hundreds of thousands of dollars worth of equity to borrow against. However, the Federal Reserve’s decisions to keep rates mostly steady in 2025 may affect borrowers’ decisions in 2026. If you plan to tap into your home’s equity for financing next year, you have two main options: a home equity line of credit (HELOC) and a home equity loan. Within this shifting landscape, one of these options may prevail over the other, as they function quite differently, and each offers unique benefits and potential downsides to borrowers. As a result, now may be the time to compare HELOCs and home equity loans for borrowing next year. That way, you have a clear idea of the route you want to take when you tap into your equity in 2026. And, to help homeowners decide if a HELOC or home equity loan is the right choice, we spoke with the experts to get an idea of which option could be better in the coming year.Find out how affordable your home equity borrowing options could be.Why a HELOC could be better in 2026HELOC rates are at their lowest point since 2023, but total home equity levels are at an all-time high. In the second quarter of 2025, U.S. homeowners had a collective amount of nearly $36 trillion in home equity. And, the average individual homeowner has about $313,000 in home equity available to borrow from. In other words, there’s a lot of money available for the credit line that’s tied to a HELOC, allowing borrowers to tap into this option for a wide range of needs.And, HELOC interest rates are variable and tied to the market. That may not be an ideal scenario in a rising-rate market, but since interest rates have been and are expected to continue decreasing, a HELOC could be the better option in 2026. “This is optimal for homeowners who need to borrow gradually, like during a phased renovation, or want the flexibility of drawing funds only when needed,” said Andrew Latham, SuperMoney director of content.There are other benefits to opting for a HELOC, too. For example, using a HELOC with low interest rates to draw on your home equity to make renovations and upgrades could make a lot of sense in today’s economic landscape, as the prices of just about everything are climbing due to high inflation. A line of credit that you can draw from as needed could come in handy in this environment, as prices aren’t fixed, and a lump-sum loan could be too limiting for some borrowers.Lumber prices are decreasing, though, making large remodels slightly cheaper right now. However, if production slows to match demand, then Morningstar predicts there could be a lumber shortage in 2026 and a subsequent price hike in response. A HELOC may provide the flexibility needed when buying materials in a volatile market.Just keep an eye on average interest rates and carefully monitor your lender’s rates. If you see your HELOC’s interest rates creeping upward in 2026, it could be time to stop drawing or only make minimum draws and then pay off your balances promptly.Compare your best home equity borrowing options online now.Why a home equity loan could be better in 2026Home equity loan rates generally follow similar trends to HELOC and mortgage rates, and we’re seeing those interest rates start to fall. If these trends continue, home equity loan rates could dip to even more favorable levels, and that’s when it’s time to take out the loan and lock in your rate. Home equity loan rates are fixed, so your rate won’t increase if rates rise again. A HELOC, on the other hand, puts you at risk of paying more if and when interest rates rise.”Historically, home equity loans are best for customers who want a fixed interest rate and know exactly how much they’ll need,” said Erik Schmitt, consumer direct channel executive at Chase Home Lending.That could also be the better option, for example, in terms of paying off your debt. The average consumer debt was $105,056 in late 2024, according to Experian. If you use a home equity loan to pay off some or all of your debt, you may get a fixed interest rate that’s lower than most personal loans, and one that’s significantly lower than what you’re paying on your credit cards currently.But this is only true if home equity loan rates dip low enough to be more attractive than HELOCs — and then they rise again. Just don’t wait too long or aggressively time the market. “Focus on the payment, not the perfect rate,” said Hector Amendola, CMB, president of Panorama Mortgage Group. “Trying to time the market rarely works. Many people have waited since 2018 for the ‘right time,’ and prices have only climbed.”Cash-out refinance as an alternativeAnother way for homeowners to access their home equity and take advantage of falling mortgage rates is a cash-out refinance. With this product, borrowers refinance their mortgage for a larger amount, based on their home’s value, and get the difference back. Lenders typically have a loan-to-value ratio maximum of 80%, which means your total loan balance, including your cash-out amount and mortgage, can’t exceed 80% of the home’s value. The benefit of a cash-out refinance over a HELOC or home equity loan is the opportunity to get a new, lower mortgage rate while also leveraging your home’s equity. As interest rates fall into 2026 and the job market cools, cash-out refinancing could help qualified homeowners reduce their monthly expenses. However, the downside is that homeowners who secured ultra-low rates in 2020 and 2021 would be trading that mortgage rate for one in the current rate environment, meaning that their monthly payments would increase drastically with this option.The bottom lineChoosing between your home equity lending options in 2026 comes down to following the market and, of course, your personal finances. If you’re willing to forego potentially lower rates for flexible financing amid volatile home renovation material prices, then a HELOC could be the better option. But if you want to secure a low, fixed rate for a fixed funding amount, then a home equity loan is worth considering. Either way, using home equity is generally cheaper than other borrowing options, like personal loans and credit cards, especially as the Federal Reserve made small rate cuts in late 2025 and predictions show further cuts in 2026.

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