HELOC vs. Home Equity Loan vs. Cash-Out Refinance: The Ultimate 2026 Comparison

Key Takeaways

• Current rates (January 2026): HELOCs average 7.25%, home equity loans average 7.56%, and cash-out refinance rates hover around 6.25% – all at their lowest levels in over three years
• HELOC works best if you have a low primary mortgage rate you want to keep and need flexible access to funds over time
• Home equity loan provides predictable fixed-rate payments when you know exactly how much you need upfront
• Cash-out refinance makes sense only if current mortgage rates are lower than your existing rate, or you’re comfortable replacing your low rate for simplicity
• Costs matter: HELOCs typically have minimal closing costs, home equity loans have moderate fees, while cash-out refinancing requires 3-6% of the loan amount in closing costs
• Experts predict home equity rates will drop to three-year lows in 2026, making this a strategic time to tap your equity if you have a clear purpose

Table of Contents

• Understanding the Basics: Three Ways to Access Your Home Equity
• Current Rates in 2026: What You’ll Pay Today
• HELOC: How It Works and When to Choose It
• Home Equity Loan: Fixed Payments for Predictable Planning
• Cash-Out Refinance: Replace Your Mortgage and Get Cash
• Side-by-Side Comparison Table
• Decision Framework: Which Option Is Right for You?
• Real-World Scenarios by Homeowner Situation
• Total Cost Analysis Over 5, 10, and 15 Years
• Tax Implications: What’s Deductible in 2026
• 2026 Rate Forecast: Where Are Rates Headed?
• Alternative Options to Consider
• Frequently Asked Questions

Understanding the Basics: Three Ways to Access Your Home Equity

If you’re a homeowner sitting on significant equity, you have three primary ways to tap into that wealth: a home equity line of credit (HELOC), a home equity loan, or a cash-out refinance. Each works differently, costs differently, and makes sense in different situations.

With $36 trillion in home equity locked in properties nationwide according to the Federal Reserve, homeowners entering 2026 have more equity than ever before. The challenge isn’t having equity – it’s choosing the right tool to access it without making an expensive mistake.

Here’s what you need to understand about each option before we dive into the details.

HELOC: Your Home Equity Credit Card

A HELOC is a revolving line of credit secured by your home. Think of it as a credit card backed by your home equity. You’re approved for a maximum credit limit (typically up to 80% of your home’s value minus what you owe), and you can draw from it as needed during a draw period, usually 10 years. You only pay interest on what you actually borrow.

After the draw period ends, you enter a repayment period (typically 20 years) where you can no longer withdraw funds and must pay back both principal and interest.

Home Equity Loan: Fixed Lump Sum

A home equity loan is a second mortgage that provides a lump sum of cash upfront. You receive all the money at closing, immediately start repaying both principal and interest, and your interest rate stays fixed for the life of the loan (typically 5-30 years).

This option works best when you know exactly how much money you need and want predictable monthly payments that never change.

Cash-Out Refinance: Replace and Extract

A cash-out refinance replaces your existing mortgage with a new, larger loan. You receive the difference in cash. For example, if you owe $150,000 on a home worth $400,000 and take out a new mortgage for $250,000, you receive $100,000 in cash (minus closing costs) and now have one mortgage payment at today’s rates.

This essentially resets your mortgage, potentially with a different term, rate, and payment amount.

Current Rates in 2026: What You’ll Pay Today

As of January 2026, home equity borrowing has become more affordable than it’s been in over three years, thanks to the Federal Reserve’s rate cuts in late 2025. Here’s what you can expect to pay:

HELOC Rates (January 2026)

The national average HELOC rate is 7.25% APR as of January 8, 2026, according to real estate analytics firm Curinos. However, rates vary significantly by lender and your financial profile. You may find rates ranging from 5.99% (introductory offers) up to 18% depending on your credit score and loan-to-value ratio.

Bankrate’s survey shows the average at 7.63%, while some lenders like FourLeaf Credit Union are offering introductory rates as low as 5.99% for 12 months on lines up to $500,000.

HELOC rates are variable and tied to the prime rate (currently 6.75%), meaning they’ll fluctuate as the Federal Reserve adjusts rates throughout 2026.

Home Equity Loan Rates (January 2026)

Home equity loan rates average between 7.56% and 8.18% depending on the term length, according to January 2026 data. Specific rates by term:

• 5-year term: 7.97% average
• 10-year term: 8.16% average
• 15-year term: 8.10% average

These are fixed rates, so your payment stays consistent for the entire loan term regardless of what happens to interest rates in the broader economy.

Cash-Out Refinance Rates (January 2026)

Cash-out refinance rates mirror conventional mortgage rates, currently averaging 6.20-6.30% for a 30-year fixed loan. According to Freddie Mac, mortgage rates started 2026 near their lowest point of 2025 at 6.15%.

While this rate appears lower than HELOC and home equity loan rates, remember that a cash-out refinance replaces your entire mortgage – including any low-rate mortgage you might already have from earlier years.

Why Rates Differ Between Products

Cash-out refinance rates are typically lowest because they’re first-position mortgages. HELOCs and home equity loans are usually second mortgages, which means they’re riskier for lenders (if you default, the first mortgage gets paid before the second). That extra risk means slightly higher rates.

HELOC: How It Works and When to Choose It

How a HELOC Actually Works

When you’re approved for a HELOC, your lender establishes a credit limit based on your available equity. Most lenders allow you to borrow up to 80% of your home’s value minus your existing mortgage balance.

Example calculation: If your home is worth $400,000 and you owe $150,000, you could potentially access a $170,000 HELOC: ($400,000 × 0.80) – $150,000 = $170,000

During the 10-year draw period, you can borrow, repay, and borrow again up to your credit limit. You typically make interest-only payments during this time, keeping monthly costs lower. Many lenders let you access funds via online transfer, checks, or a debit card linked to your HELOC.

After the draw period ends, you enter the 20-year repayment period where you can no longer borrow and must pay back both principal and interest.

HELOC Advantages

• Keep your low mortgage rate: If you have a 3% or 4% mortgage from 2020-2021, a HELOC lets you access equity without touching that favorable rate
• Flexibility: Borrow only what you need, when you need it. If you draw $20,000 but have a $100,000 limit, you only pay interest on $20,000
• Lower upfront costs: Most HELOCs have minimal or no closing costs compared to refinancing
• Potentially lower initial payments: Interest-only payments during the draw period can be $313/month on a $50,000 balance at 7.50%, compared to $482/month for a home equity loan
• Revolving credit: As you pay down the balance, you can borrow again during the draw period

HELOC Disadvantages

• Variable rates mean uncertainty: Your 7.25% rate today could rise to 9% or 10% if the Fed raises rates. When HELOC rates peaked at 10.16% in early 2024, monthly interest on a $50,000 balance was $423 – that’s $119 more per month than at today’s 7.25% rate
• Payment shock risk: After getting comfortable with low interest-only payments, the switch to principal-plus-interest repayment can be jarring. Your payment could double or triple
• Temptation to overspend: Having $100,000 available can tempt you to borrow more than you truly need
• Potential for negative equity: If home values drop and you’ve tapped most of your equity, you could owe more than your home is worth
• Minimum draw requirements: Some lenders require you to draw a minimum amount at closing (often $10,000-$25,000), even if you don’t need it immediately

When a HELOC Makes the Most Sense

Choose a HELOC when you:

• Have a mortgage rate below 5% that you don’t want to replace
• Need flexible access to funds over time (ongoing home renovations, college tuition over multiple years)
• Have variable or uncertain expenses you want to be prepared for
• Plan to pay off the balance relatively quickly to minimize interest rate risk
• Want to keep your primary mortgage separate from your equity borrowing

“If a homeowner is sitting at a lower rate, a HELOC might be a better option because it allows you to borrow against your home’s equity without changing the terms of your existing mortgage,” explains Bhavesh Patel, head of field sales at Chase Home Lending.

Home Equity Loan: Fixed Payments for Predictable Planning

How Home Equity Loans Work

A home equity loan (sometimes called a second mortgage or HEL) provides a lump sum at closing with a fixed interest rate and fixed monthly payment for the entire term. You receive all the money upfront, immediately start making principal and interest payments, and know exactly what you’ll pay every month until the loan is paid off.

Terms typically range from 5 to 30 years, with 10 and 15-year terms being most common.

Home Equity Loan Advantages

• Rate certainty: Your 7.97% rate stays 7.97% regardless of Fed actions or market changes
• Predictable payments: $611.40/month on a $50,000 loan at 8.18% for 10 years – that payment never changes
• Forced discipline: Unlike a HELOC where you can re-borrow, a home equity loan forces you to pay it down systematically
• Keep your primary mortgage intact: Like a HELOC, this is a second mortgage, so your original low-rate mortgage stays untouched
• No draw period confusion: Simple to understand – you get money, you pay it back with interest, done

Home Equity Loan Disadvantages

• Higher upfront rates: At 7.56-8.18%, home equity loans currently cost more than HELOCs (7.25%) and cash-out refis (6.25%)
• Immediate repayment: You start paying principal and interest right away, unlike HELOC’s interest-only draw period
• No flexibility: If you borrow $50,000 but only use $30,000, you’re paying interest on the full $50,000 from day one
• Can’t re-borrow: Once you pay it down, that money isn’t available again without applying for a new loan
• Closing costs: While lower than refinancing, home equity loans typically have moderate closing costs ($500-$2,000)

When a Home Equity Loan Makes the Most Sense

Choose a home equity loan when you:

• Know exactly how much you need (kitchen renovation cost, debt consolidation amount)
• Want payment certainty and protection from rising rates
• Prefer the discipline of structured repayment
• Have a low primary mortgage rate you want to preserve
• Don’t need ongoing access to additional funds

Cash-Out Refinance: Replace Your Mortgage and Get Cash

We recommend checking with at least 3 different lenders

How Cash-Out Refinancing Works

A cash-out refinance replaces your existing mortgage with a new, larger one. The difference between your old mortgage balance and your new loan amount is paid to you in cash at closing (minus closing costs).

Example: You owe $150,000 on your current mortgage at 3.5% with 20 years remaining. Your home is worth $400,000. You decide to do a cash-out refinance for $250,000 at 6.25% for 30 years. You receive approximately $97,000 in cash ($250,000 new loan – $150,000 old balance – $3,000 closing costs), and now you have one new mortgage payment.

Cash-Out Refinance Advantages

• Lowest interest rate: At 6.20-6.30%, cash-out refinance rates are 1-2 percentage points lower than home equity loans or HELOCs
• One monthly payment: Instead of juggling a first mortgage plus a HELOC or second loan, you have just one payment to manage
• Potential to lower your overall rate: If your current mortgage rate is 7% or higher (common for homes purchased in 2022-2023), refinancing to 6.25% while pulling out cash could actually lower your monthly payment
• Long-term predictability: Fixed-rate loan means 30 years of consistent payments
• Potentially tax-deductible: If used for home improvements, the interest may be tax-deductible on the entire loan amount

Cash-Out Refinance Disadvantages

• Replaces your low-rate mortgage: If you have a 3.5% rate, replacing it with 6.25% significantly increases your interest costs over time, even if you’re only “borrowing” a small amount of additional equity
• Resets your loan term: If you had 15 years left on your mortgage, you’re now potentially looking at 30 years of payments again
• High closing costs: Expect 3-6% of the new loan amount. On a $250,000 loan, that’s $7,500-$15,000 in closing costs
• Longer path to equity rebuilding: You’re starting over with a higher loan balance and longer term, slowing your equity accumulation
• All-or-nothing proposition: You can’t partially refinance – it’s your entire mortgage or nothing

When Cash-Out Refinance Makes the Most Sense

Choose a cash-out refinance when you:

• Have a current mortgage rate at or above 7% (2022-2023 buyers)
• Want to simplify to one payment and are comfortable with the new rate
• Need a large lump sum ($100,000+) and want the lowest possible interest rate on it
• Plan to stay in your home long enough to recoup closing costs (typically 2-3 years minimum)
• Value simplicity over preserving your current loan terms

As one expert noted, “The recent rise in refinance activity, driven by falling rates, has primarily centered on borrowers aiming to lower their monthly payments rather than extract equity.” This means cash-out refinancing is currently best for those who can improve their primary mortgage rate, not just extract cash.

Side-by-Side Comparison Table

Decision Framework: Which Option Is Right for You?

Use this decision tree to identify the best option for your situation:

Step 1: What’s Your Current Mortgage Rate?

If your rate is 5% or lower: Rule out cash-out refinancing. You don’t want to replace a low rate with 6.25%. Move to Step 2 to decide between HELOC and home equity loan.

If your rate is 6-7%: Cash-out refinancing might make sense if you need a large amount ($100,000+) and the closing costs are justified. Otherwise, consider HELOC or home equity loan.

If your rate is above 7%: Cash-out refinancing could actually save you money while providing access to equity. Run the numbers carefully on total interest paid.

Step 2: How Much Do You Need and When?

Need ongoing access over time (home renovations in phases, college tuition over multiple years): HELOC is your best bet. Borrow only what you need as you need it.

Know exactly what you need right now (one-time expense like debt consolidation or finished basement): Home equity loan or cash-out refinance, depending on your current mortgage rate.

Step 3: How Do You Feel About Variable Rates?

Comfortable with rate fluctuation and planning to pay it off quickly: HELOC can work well, especially if you benefit from the interest-only draw period.

Want absolute payment certainty: Home equity loan (if keeping your current mortgage) or cash-out refinance (if replacing your mortgage makes sense rate-wise).

Step 4: What’s Your Timeline in the Home?

Selling within 2-3 years: Avoid cash-out refinancing due to high closing costs you won’t recoup. Choose HELOC (lowest closing costs) or home equity loan.

Staying 5+ years: All options are viable if they make financial sense based on the other factors.

Step 5: How Important Is Payment Simplicity?

Strongly prefer one payment: Cash-out refinance (if the rate works) or home equity loan (if you value fixed payments and want to keep your primary mortgage).

Comfortable managing two loans: HELOC or home equity loan keep your primary mortgage intact while adding a second payment.

Real-World Scenarios by Homeowner Situation

Scenario 1: Pandemic-Era Homeowner with 3.25% Rate

Situation: Sarah bought her home in 2021 with a $250,000 mortgage at 3.25%. Her home is now worth $425,000. She needs $75,000 for a kitchen renovation and master bathroom upgrade.

Best Choice: HELOC

Why: Sarah’s 3.25% rate is exceptional – 3 percentage points below current refinance rates. Replacing it would cost her tens of thousands in additional interest over the life of the loan. A HELOC lets her access the $75,000 she needs while keeping her primary mortgage untouched. The renovation will happen in phases over 9 months, so she can draw funds as contractors complete work, paying interest only on what she’s used.

Monthly Impact: HELOC payment of approximately $469/month (interest-only at 7.5% on $75,000) keeps her housing costs manageable while preserving her ultra-low mortgage rate.

Scenario 2: Recent Buyer with 7.5% Rate

Situation: James bought in late 2023 with a $300,000 mortgage at 7.5% on a home now worth $350,000. He needs $40,000 to pay off high-interest credit card debt.

Best Choice: Cash-Out Refinance

Why: James is paying 7.5% on his mortgage when current refinance rates are 6.25%. He could refinance to a $340,000 loan, receive approximately $37,000 in cash (after closing costs), pay off his credit cards, AND lower his monthly mortgage payment by approximately $250. He’s improving his interest rate while extracting equity.

Monthly Impact: His current $300,000 at 7.5% = $2,098/month. New $340,000 at 6.25% = $2,093/month. He increases his loan by $40,000 but his payment barely changes because of the lower rate.

Scenario 3: Empty Nesters Planning Multiple Home Projects

Situation: Tom and Linda have a $175,000 mortgage at 4.75% on a home worth $500,000. They want to update three bathrooms ($45,000), add a backyard patio ($25,000), and possibly replace the roof next year if needed ($30,000). They’re not sure exactly when each project will happen.

Best Choice: HELOC

Why: The uncertainty and timeline of these projects makes a HELOC ideal. They can get approved for a $100,000 credit line, draw $45,000 for the bathrooms immediately, add $25,000 when they’re ready for the patio project, and have funds available for the roof if inspection shows it’s needed. They only pay interest on what they actually use. Their 4.75% mortgage is too good to replace.

Monthly Impact: First draw of $45,000 at 7.5% = approximately $281/month interest-only, increasing as they draw more funds.

Scenario 4: Homeowner Consolidating Debt with Fixed Budget

Situation: Maria has a $200,000 mortgage at 4.25% and $62,000 in various debts (car loan, credit cards, personal loan). Her home is worth $380,000. She wants to consolidate everything into one payment she can predict and budget for.

Best Choice: Home Equity Loan

Why: Maria needs a fixed amount ($62,000) for a specific purpose (debt consolidation) and values payment predictability. A 15-year home equity loan at 8.13% gives her a fixed payment of approximately $601/month. This replaces multiple higher-interest debt payments and provides the structure and certainty she needs. The fixed rate protects her from HELOC variable rate risk, and she keeps her excellent 4.25% primary mortgage.

Monthly Impact: She replaces approximately $1,800 in various debt payments with $601 in fixed home equity loan payments, improving cash flow by $1,199/month.

Scenario 5: Homeowner Downsizing Soon

Situation: Robert plans to sell his home in 18 months when his youngest graduates high school. He needs $35,000 now for his daughter’s college expenses. His home is worth $465,000 with a $220,000 mortgage at 4.5%.

Best Choice: HELOC

Why: Robert’s short timeline rules out cash-out refinancing – he won’t recoup the closing costs before selling. Between HELOC and home equity loan, HELOC wins because of minimal closing costs and flexibility. He’ll pay the balance when he sells the house in 18 months, and he only pays interest during that time since he’s in the draw period. At 7.5%, his interest costs over 18 months on $35,000 are approximately $4,000 vs. $4,300 for a home equity loan plus closing costs.

Monthly Impact: $219/month (interest-only) that he can easily manage for the remaining time in the house.

Total Cost Analysis Over 5, 10, and 15 Years

Let’s compare the real costs of borrowing $50,000 through each method. These examples assume you’re keeping the loan for the full period and include average 2026 rates.

5-Year Comparison

HELOC (7.5% variable, assuming rate stays constant)

• First 5 years: Interest-only payments of $313/month
• Total paid: $18,780 in interest
• Principal balance remaining: $50,000 (nothing paid toward principal yet)
• Note: After 5 years, you’d enter repayment with $50,000 still owed

Home Equity Loan (8.18%, 10-year term)

• Fixed payment: $611/month
• Total paid over 5 years: $36,660
• Interest paid: $17,020
• Principal paid: $19,640
• Balance remaining: $30,360

Cash-Out Refinance (6.25%, 30-year term)

• This one’s complex because it depends on your existing mortgage
• Example: You had $200K at 4% (15 years left), now have $250K at 6.25% (30 years)
• Old payment on $200K: $1,480/month
• New payment on $250K: $1,539/month
• Extra monthly cost: $59/month
• But you lost your 4% rate, which costs you approximately $22,000 more in interest over 5 years compared to keeping the original mortgage

Winner at 5 years: Home equity loan has paid down $19,640 in principal while total costs are similar to HELOC.

10-Year Comparison

HELOC (entering repayment after year 10)

• Years 1-10: Interest-only at $313/month = $37,560
• Balance remaining: $50,000
• Years 11-30: Principal and interest payment (now entering repayment phase)
• Total cost over first 10 years: $37,560 with full balance still owed

Home Equity Loan (8.18%, 10-year term – PAID OFF)

• Fixed payment: $611/month
• Total paid over 10 years: $73,320
• Interest paid: $23,320
• Principal paid: $50,000 (loan is paid off)
• Balance remaining: $0

Cash-Out Refinance

• Total extra interest cost compared to keeping old mortgage: approximately $45,000 over 10 years
• Only makes sense if your original rate was above 6.25%

Winner at 10 years: Home equity loan is completely paid off, while HELOC still has full balance owed and cash-out refi has cost significantly more if you replaced a low-rate mortgage.

15-Year Comparison

HELOC (5 years into repayment period)

• Years 1-10: $37,560 in interest-only payments
• Years 11-15: Principal and interest payment of approximately $415/month
• Total paid: $62,460
• Balance remaining: approximately $38,000
• Still 15 more years of repayment ahead

Home Equity Loan (already paid off at 10 years)

• Total cost: $73,320
• Balance remaining: $0
• Years 11-15: No payment – loan is done

Cash-Out Refinance

• Depends heavily on what mortgage rate you replaced
• If you replaced a 3.5% rate with 6.25%, you’ve paid approximately $70,000 more in interest over 15 years
• If you replaced a 7.5% rate with 6.25%, you’re actually saving money while accessing equity

Winner at 15 years: Home equity loan is completely paid off and has cost the least in total interest. HELOC is least expensive if you paid it off quickly during draw period rather than making minimum payments.

Key Takeaway from Cost Analysis

The “cheapest” option depends entirely on how you use it and what mortgage rate you’re replacing. A HELOC can be the most expensive if you make only minimum payments, or the cheapest if you pay it off aggressively. A cash-out refinance can be a disaster if you replace a 3.5% mortgage, or a smart move if you’re refinancing from 7.5%.

Tax Implications: What’s Deductible in 2026

The tax treatment is similar for all three options, but there are important nuances to understand.

When Interest Is Deductible

Under current tax law (Tax Cuts and Jobs Act), you can deduct interest on home equity debt only if the funds are used to “buy, build, or substantially improve” the home that secures the loan. This applies to HELOCs, home equity loans, and cash-out refinances.

Deductible uses:

• Kitchen or bathroom renovation
• Room addition or finishing basement
• New roof or HVAC system
• Deck, patio, or other permanent home improvements

NOT deductible uses:

• Paying off credit cards
• Buying a car
• College tuition
• Vacation expenses
• Business investments

Deduction Limits

You can deduct interest on up to $750,000 of mortgage debt ($375,000 if married filing separately) if you bought your home after December 15, 2017. For homes purchased before that date, the limit is $1 million ($500,000 married filing separately).

This limit applies to your total mortgage debt – your primary mortgage plus any home equity loan, HELOC, or cash-out refinance amount combined.

Itemization Requirement

You must itemize deductions to claim mortgage interest. With the standard deduction at $29,200 for married couples in 2026 (and $14,600 for single filers), many homeowners don’t itemize and therefore don’t benefit from the mortgage interest deduction.

Quick calculation: If you’re in the 24% tax bracket and pay $5,000 in deductible interest, you save $1,200 on taxes ($5,000 × 0.24). But only if you itemize and your total itemized deductions exceed the standard deduction.

Cash-Out Refinance Tax Treatment

The cash-out portion of a refinance is treated the same as a home equity loan – the interest is only deductible if used for home improvements. The portion that replaces your existing mortgage maintains its deductibility status based on how the original mortgage was used (buying the home qualifies).

Record-Keeping Matters

Keep receipts and records showing how you used the funds. The IRS could ask you to prove the money went toward qualifying home improvements. Save contractor invoices, building permits, and payment records.

State Tax Considerations

Some states have different rules about mortgage interest deductibility. Check with a tax professional in your state, especially in high-tax states like California, New York, and New Jersey where state tax benefits can be significant.

2026 Rate Forecast: Where Are Rates Headed?

Understanding where rates might go in 2026 can help you decide between fixed and variable-rate options.

Expert Predictions for 2026

Ted Rossman, Bankrate’s senior industry analyst, forecasts home equity loan rates to average 7.75% in 2026 and HELOC rates to average 7.3%. He expects three quarter-point rate cuts by the Federal Reserve in 2026.

“We could see lower home equity rates than we’ve seen for most of the past few years, but nowhere near as low as you could have gotten in 2021 or 2022,” Rossman explains. “That is going to make home equity borrowing a more viable option for people.”

Heather Long, chief economist at Navy Federal Credit Union, projects an 85% probability that HELOC rates fall in 2026, potentially dropping a full percentage point if the Fed cuts rates to just below 3%.

What’s Driving Rates Down

Several factors support falling home equity rates in 2026:

• Fed rate cuts: The Federal Reserve cut rates three times in late 2025, bringing the prime rate to 6.75%, with more cuts expected in 2026
• Labor market focus: The Fed is now prioritizing employment over inflation, making cuts more likely
• Inflation cooling: After running hot in 2022-2023, inflation has moderated closer to the Fed’s 2% target
• Economic stability: A stable economy without major shocks should allow gradual rate reductions

What Could Push Rates Higher

Experts identify several risks that could reverse the downward trend:

• Inflation reacceleration: If inflation heats up again, the Fed would pause or reverse cuts
• Economic overheating: Strong GDP growth and tight labor markets could force the Fed to keep rates higher
• Policy uncertainty: Changes in Fed leadership or unexpected policy shifts could impact rate trajectory
• Global events: International crises or supply chain disruptions could reignite inflation

However, most experts assign low probability to rate increases. Shmuel Shayowitz, president and chief lending officer at Approved Funding, says there’s “zero percent chance that HELOC rates will rise in 2026.”

What This Means for Your Decision

If rates are expected to fall:

• HELOCs become more attractive since your variable rate will decrease automatically
• You could start with a home equity loan now and refinance to a HELOC later if rates drop significantly
• Waiting might get you a better rate, but you miss out on using the funds now

If you’re risk-averse:

• Lock in a fixed-rate home equity loan or cash-out refinance to protect against the possibility that forecasts are wrong
• The peace of mind might be worth a slightly higher rate

Most experts recommend not timing the market perfectly. If you have a genuine need for the funds now and can afford the current rates, acting now often beats waiting for a slightly better rate that may or may not materialize.

Alternative Options to Consider

Before committing to a HELOC, home equity loan, or cash-out refinance, consider these alternatives that might better fit your situation:

Personal Loan

Best for: Smaller amounts ($5,000-$50,000) needed quickly without risking your home

Personal loans don’t use your home as collateral, which means faster approval (often within days) and no risk of losing your house if you can’t repay. However, rates average 12%+ in 2026 – significantly higher than home equity options.

When it makes sense: You need $20,000 or less, value speed over cost, and don’t want a lien on your home.

0% APR Credit Card

Best for: Short-term needs under $20,000 that you can pay off within 12-21 months

Many credit cards offer 0% introductory APR periods for 12-21 months on purchases or balance transfers. If you can pay off the full amount before the promotional period ends, you pay zero interest.

When it makes sense: You need funds for 6-18 months, have excellent credit to qualify, and are disciplined enough to pay it off completely before the promo expires.

401(k) Loan

Best for: True emergencies when other options aren’t available

You can typically borrow up to $50,000 or 50% of your vested balance, whichever is less. You pay yourself back with interest, and if you stay with your employer, there’s no early withdrawal penalty.

When it makes sense: Only as a last resort. You risk your retirement savings, face opportunity cost from money not invested, and if you leave your job, you typically must repay the full balance within 60-90 days or face penalties and taxes.

Home Equity Investment (HEI)

Best for: Homeowners who want cash without monthly payments

A company gives you a lump sum (typically $25,000-$500,000) in exchange for a percentage of your home’s future value (typically 10-25%). No monthly payments, but when you sell or after 10-30 years, you share the appreciation with the investor.

When it makes sense: You can’t qualify for traditional financing, need cash now, and are comfortable sharing future equity gains. However, these can be very expensive in appreciating markets.

Reverse Mortgage (62+)

Best for: Homeowners 62 or older who want to age in place without monthly payments

A reverse mortgage allows you to access equity without monthly payments. The loan is repaid when you sell, move, or pass away. This is complex and expensive but can work for elderly homeowners who are house-rich but cash-poor.

When it makes sense: You’re 62+, plan to stay in the home long-term, have significant equity, and can afford the ongoing costs (property taxes, insurance, maintenance). Get independent counseling before proceeding.

Family Loan

Best for: Smaller amounts with flexible repayment

Borrowing from family can offer flexible terms and low/no interest. However, it mixes money and relationships, which can create tension if repayment issues arise.

When it makes sense: You have a strong relationship with a family member who can afford to lend the money, you document everything in writing, and you’re absolutely committed to repaying as agreed.

Frequently Asked Questions

The Bottom Line: There’s no universally “best” option for tapping home equity. A HELOC offers flexibility and preserves low mortgage rates but comes with variable-rate risk. A home equity loan provides payment certainty with a fixed rate. Cash-out refinancing offers the lowest interest rate but only makes sense if you’re not replacing a significantly better mortgage rate.

Evaluate your current mortgage rate first (the most important factor), then consider how much you need, your timeline, and your comfort with variable payments. For most homeowners in 2026 with pandemic-era mortgages below 5%, a HELOC or home equity loan will be more cost-effective than a cash-out refinance, despite the slightly lower refinance rate.

With rates at their lowest point in over three years and experts predicting further declines, 2026 is shaping up to be a good year to strategically tap your home equity – if you have a clear purpose and solid plan to repay.