The Federal Reserve is currently untouched for two consecutive times without interest rates. Benchmark federal fund rates remained at just 4.25-4.5%, with the central bank making an announcement at its latest meeting on March 19, as in January. It was in great contrast to the last few months of last year, with three consecutive slashes of interest rates and a corresponding decline in the costs of home equity loans and home equity lines (HELOCS).
You may be wondering what this means to borrowers. If you already have HELOC, do you know the rate change? Is this the best time to take a home equity loan? Should a Fed suspend change your feelings about borrowing for your home equity in general?
Let’s break down everything you need to know about tapping your home equity these days.
How will the Fed rate reduce the impact on Helock and home equity loans?
The Fed’s cut interest rates could have immediate impact on HELOCS and Home Equity Loans. However, it varies, reflecting the different nature of these two forms of borrowing.
HELOCs usually have variable interest rates that are directly linked to the prime rate. This usually moves in conjunction with the federal fund rate (benchmark interest rate adjusted by the Fed). Therefore, changing the Fed’s funding rate will ultimately launch a chain reaction that will hit your HELOC. “As the prime rate drops, interest rates on the fluctuating HELOC account balances will also fall by a similar amount, lowering borrowers’ interest payments,” said Charlie Wise, Senior Vice President, Transunion and Head of Global Research and Consulting.
Home equity loans, on the other hand, usually have a fixed interest rate set when you withdraw your loan. So if you currently have a Helone, it will not be affected by the movements the Fed has made. Of course, a new home equity loan can reflect any rate change. You may see new numbers advertised within a few weeks.
Overall, of the two, HELOC responds to central bank monetary policy moves. Lenders will typically offer better deals on new credit lines following the Fed rate cuts, but “existing HELOC borrowers will see their interest rates fall at the same pace as the Federal Reserve cuts benchmark interest rates,” says Greg McBride, Bankrates chief financial analyst. “Historically, when interest rates are lower, fixed-rate residential equity loans have a low interest rate sensitivity.
“Not all lenders are cutting interest rates and certainly not at the same speed, so borrowers looking for home equity loans need to shop,” he adds.
How much can you save?
So how much will a quarter-point rate drop (the size of the Fed’s December 2024 cut) save you? The exact amount depends on the size of your loan/credit line and the remaining period.
Let’s say you have a HELOC balance of $100,000 and your current rate is 8.5%. A quarter-point reduction could potentially reduce the rate to 8.25%, depending on how the terms of the loan are structured. This saves you nearly $21 a month or nearly $250 a year. That amounts to nearly $5,000 over 20 years. This is the typical length of the HELOC repayment period. (We assume that your average loan is assessing the overall time rate.)
And that happens quite quickly too. “HELOC borrowers should make sure that if they are typically within one or two statement cycles and sometimes there is a three-month delay, the rate will be lowered in response to the Fed rate reduction,” says McBride.
Or let’s say you’re looking at a 20-year home equity loan for a total of $100,000. That rate fell from 8.4% to 8.15%. That quarter cut can save nearly $16 a month. It sounds small, but it’s over $3,700 more than the lifespan of the loan.
Where is your home equity rate headed?
Last fall, the Fed’s interest cuts lowered housing equity borrowing costs. Despite the suspension of the year, they continue to get cheaper. The average HELOC rate has fallen by almost 2 percentage points from the peak of nearly 10% in September 2024, the lowest in two years. Although more modest, home equity loans have also fallen.
However, dramatic changes in home equity rates will not occur overnight, McBride predicts. “As the Fed cuts short-term interest rates and the prime rate drops, existing HELOC rates will be down the stairs in close concerts,” he says. “While fixed-rate residential equity loans are slower, they are more likely to be leveled as long as the long-term Treasury yields continue to rise.”
“That being said, the choice of the right product for you doesn’t depend solely on fees, but on the details of how you access your funds and how you handle repayment,” he adds.
Should you refinance your Heroan?
If you currently have a home equity loan, that lock-in rate will probably make you feel excluded from the party you fell on. If so, refinance makes sense if your home equity loan interest rates drop significantly since you took the loan. A general rule of thumb states that interest rates must be reduced by at least one percentage point to make Refi worthwhile.
Not only can refinance reduce monthly payments, it can also reduce the total interest paid over the lifespan of the loan. But don’t forget: Refinance is not free. Expect to pay the closure fee, origin, credit report and other fees.
“If you have a home equity loan, it’s probably worth sticking to it until your Heloc fees fall below your existing home equity rate,” says Frick. “Then you can think of refinancing to HELOC. Or you can refinance yourself with another home equity loan, but that can be expensive.”
Should I tap Home Equity now?
Regardless of what the Fed is doing, and still painted pencils with some interest rate cuts in 2025, is this the best time to capitalize on the wealth of housing? After all, the average mortgage-holding homeowner sits at $203,000 in tapable equity. Housing renovations, debt settlement and investment opportunities are one reason why people rely on their country’s capital for cash.
“Acquiring a HELOC at this time is ideal for homeowners as it allows homeowners to use their stocks in their homes without affecting their existing low mortgage rates.” “As rates continue to decline, so are eligible rates for variable-rate HELOC products. Lower rates amount to reduced payments.”
But it’s important to keep things in context. Though lower than unsecured personal loans and credit cards, as McBride points out, home equity loans and HELOCs are not very cheap. As of March 19th, the average home equity loan rate was 8.37% and the average HELOC rate was 8.03%. And borrowing the minimum five-digit total that many lenders argue, that interest can rapidly increase your debt.
Additionally, the debt is supported as collateral by your home. Translation: The lender can seize it.
“It’s something that people who don’t have savings, already in debt and don’t have a regular income stream need to think about really hard,” says Frick. “Want to take on this extra risk? With a car loan, you lose your car. You can usually go through without a car or rent another person’s car. You can’t rent another person’s house.
