HELOC rates vs mortgage rates: which is cheaper in 2022?

Are today’s HELOC rates worth it?

HELOC rates tend to be a bit higher than mortgage rates. So why are more homeowners opting for a HELOC over a cash refinance?

One reason is that a HELOC allows you to borrow only the amount of home equity you need. You don’t have to refinance your entire mortgage or pay interest on it.

A HELOC also provides an ongoing line of credit that you can draw on as needed. And, unlike a cash refinance, they are relatively inexpensive to set up. Thus, a HELOC often costs less than a mortgage with withdrawal in the end.

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What are the current HELOC rates?

Like mortgage rates, HELOC rates have been very volatile recently. On July 13, 2022, Nasdaq reported that the average interest rate for a 10-year HELOC was at a 52-week high of 5.51% and a 52-week low of 2.55%. For a 20-year HELOC, the 52-week high was 7.46% and the 52-week low was 5.14%.

Meanwhile, 30-year fixed mortgage rates were at a 52-week high of 5.81% and a 52-week low of 2.65%, closely mirroring the range of a 10-year HELOC.

	52 week high	52 week low
10 year HELOC	5.51%	2.55%
20 year HELOC	7.46%	5.14%
30-year fixed mortgage	5.81%	2.65%

Sources: Nasdaq (HELOC rates), Freddie Mac (30-year fixed mortgage rates)

None of this is surprising. Virtually all interest rates have skyrocketed in the first half of 2022. And so have HELOC rates.

You may be able to get lower rates than a 20-year HELOC by choosing a cash refinance or home equity loan. But refinances usually come with higher closing costs.

Meanwhile, a HELOC typically has a significantly lower interest rate than other forms of borrowing, such as personal loans and credit cards. Tariffs on plastic could be twice as high. So if you want a line of credit that you can borrow from and repay at a low rate, a HELOC might be the answer.

How HELOC Interest Rates Work

HELOC rates work a little differently than standard mortgage rates.

Most cash refinances involve a new 30-year fixed rate mortgage. Likewise, almost all home equity loans have fixed interest rates. In contrast, HELOCs are generally variable rate loans, meaning your interest rate can go up and down over time with the market.

HELOCs are generally variable rate loans, which means your interest rate can go up and down over time with the market.

Another major difference is that, during the HELOC “draw period,” interest is only charged on your loan balance (the amount of your credit limit you’ve used). In contrast, mortgage interest rates are always charged on the full loan amount. This means that HELOC payments are generally much lower than mortgage payments.

Some lenders offer fixed rate HELOCs or allow you to fix the rate on a particular outstanding balance over the course of the loan. You can also convert your HELOC into a home equity loan. However, lenders generally charge a higher rate on these types of HELOCs because they bear more of the risk.

How HELOC rates and payments are structured

HELOCs are structured in two parts. They have a “draw period” and a “refund period”.

During the draw period, you can borrow and repay your HELOC as often as you like up to your credit limit. And you only pay interest on the outstanding loan balance. In other words, you are not obligated to repay any part of the capital during your drawdown period, although you can do so if you wish.

The duration of the HELOC draw period may vary. Common options include five, 10, 15 or 20 years. When the draw period ends, the redemption period begins. And that often lasts five or ten years.

During the repayment period, your HELOC effectively becomes an installment loan. You can no longer borrow. And your monthly payments are fully “amortized”, which means that your loan will be fully paid off at the end of the repayment period.

HELOC Rates vs. Mortgage Rates

Typically, mortgage rates are significantly lower than HELOC rates. This is because HELOCs are considered riskier for mortgage lenders. A HELOC is a “second mortgage” or “second lien” – meaning that in the event of a foreclosure, the primary mortgage lender is paid first and the HELOC lender could potentially be paid less or not at all. And lenders charge more to compensate for this risk.

But these relationships can change in unusual interest rate markets. For example, in mid-2022, there were 10-year HELOC rates close to – or even a little lower than – 30-year fixed mortgage rates.

This is partly because 10-year HELOCs have variable interest rates and shorter loan terms. This relieves lenders of much of the risk if rates continue to rise.

Is a HELOC or mortgage cheaper?

With mortgage and HELOC rates where they are, a HELOC might just be a good option right now. This is especially true because HELOCs tend to have lower closing costs than a cash refinance.

Keep in mind that closing costs partly depend on the size of your loan. With a HELOC, the loan amount is just your credit limit. With a cash-out refinance, it’s your entire existing mortgage balance plus the lump sum you’re borrowing.

But here’s the real question you should be asking yourself: is a HELOC or mortgage cheaper for you? Because the cost of each will vary wildly depending on factors like your credit score, debt-to-equity ratio, and the amount of equity you want to borrow. There is no single answer.

Mortgage and HELOC rates also vary wildly from lender to lender. Some offer low rates and high closing costs while others have higher rates and lower closing costs.

There are no shortcuts here. Your best bet is to register with a mortgage lender and get quotes on a HELOC and cash refinance. Your loan officer will help you decide which type of loan is best for your financial situation.

How to find your best HELOC rate

Just like with mortgage purchases, the only way to find your lowest HELOC rate is to get quotes from several lenders and compare their offers. Look not just for the lowest rate, but for the best combination of interest rate and upfront fee.

We recommend getting HELOC quotes from at least three to five lenders, including your existing bank, your existing mortgage lender, and various other sources such as online lenders and credit unions. You can also check out lenders recommended by your family, friends and colleagues.

If you want the best possible HELOC rate, it’s also worth doing a financial checkup before you apply. Remember that lenders give the lowest rates to borrowers with good credit and low debt levels. In particular, try to:

You may not have the time or ability to do any or all of these. But, if you can, you could save some great savings on the HELOC rates and closing costs you are offered.

Your next steps

HELOC rates are generally higher than mortgage rates. But you only have to pay interest on what you borrow, which means HELOC payments are often much lower than mortgage payments. So there are pros and cons to both options.

Ask a lender to find out what HELOC rate you qualify for today.