Alex Potemkin/Getty Images
The Federal Reserve has finally begun lowering interest rates, giving hope to homeowners looking to tap into the value of their property with a Home Equity Line of Credit (HELOC). The Fed’s moves are already starting to have an impact, with HELOC rates falling below 9% for the first time in more than a year.
With the possibility of further interest rate cuts, the next move in HELOC interest rates is attracting attention. Will it continue to fall with the autumn leaves?
What is the outlook for HELOC interest rates?
The Fed cut interest rates by half a percentage point in September, the first such cut since the coronavirus pandemic. As a result, HELOC interest rates, which typically follow the Fed’s lead, began to decline, dropping to their lowest level in a year in early October.
“HELOC interest rates for existing borrowers will typically be affected by Fed rate cuts with a lag of one to two months,” said Greg McBride, chief financial analyst at Bankrate. McBride added that the Fed is expected to cut rates at least one more time before the end of the year. As a result, HELOC borrowers may find the deal more favorable to new borrowers with promotional offers at below-market rates for the first few months, which should result in a corresponding reduction in interest rates. is.
The big question now is how low HELOC interest rates can go. “Homeowners could see HELOC rates below 8% by the end of the year,” said Mark Hamrick, senior economic analyst at Bankrate. But he stressed that borrowing costs are unlikely to return to the lows below 5% seen during the Great Recession or the lows that fell to 3.86% during the pandemic.
McBride notes that variable interest rates on HELOCs can decline faster than fixed mortgage rates or credit card rates.
Because credit cards are unsecured, they charge much higher interest rates than HELOCs because there is no collateral. Over the past week, the average interest rate on credit cards reached 20.53%, near an all-time high.
What Affects HELOC Rates?
HELOC interest rates primarily follow the prime rate and are influenced by the Federal Reserve’s monetary policy movements. When the Fed lowers the benchmark federal funds rate, HELOC interest rates typically fall, and when the Fed raises interest rates, the opposite usually occurs, causing interest rates to rise.
Of course, the Fed does not operate in a vacuum. Additionally, Sara Alvarez, vice president of mortgage banking at William Rabeis Mortgage, said some market factors, including stronger-than-expected economic and geopolitical events, could dampen expected rate cuts and lower HELOC rates. It has been pointed out that there may be delays.
“With economic indicators pointing to strong employment numbers, concerns that Middle East wars could lead to inflation are roiling markets, especially when oil prices are taken into account,” she says. “For now, it seems likely that the[Fed’s next]rate cut will be a quarter point instead, but that could change depending on tomorrow’s news.”
Is now a good time to get a HELOC?
With HELOC interest rates at their lowest levels in over a year, is it time to jump on the HELOC bandwagon?
Despite the dramatic decline, it’s important to stay on top of the situation. Even though home equity lines of credit hover in the 8-9% range, they are not necessarily a low-cost source of financing. As McBride puts it, “HELOC rates will go from ‘high’ to ‘not so high'” in the near future, even if there is a decline.
But while interest rates are still high compared to pre-2023 levels, it’s still worth considering a HELOC, especially if you’ve significantly increased your home ownership, as many homeowners in the U.S. do. Some experts say there may be. CoreLogic reports that home equity levels continued to rise in the first two quarters of 2024, with the average homeowner with a mortgage now having more than $300,000 in equity. The industry journal’s research found that home equity line of credit originations (i.e., people opening new HELOCs) slowed for three consecutive quarters, before rebounding over the same period. home equity financing news.
“Many people have used HELOCs even during rising interest rate cycles,” said Brian Gusebin, president of home loans at Univest Bank & Trust. “With historically high home prices, HELOCs are an easy way to leverage home equity. Most HELOCs are tied to the prime rate, which lowers with Fed rate cuts, so you can eliminate high credit card debt. This could be a good time for people who want to pay off their debt, renovate their home or make a major purchase that would usually attract higher interest rates.
