However, like almost everything else, home equity loan and HELOC rates depend on the economy. And, with the Federal Reserve pausing interest rate hikes for the second time this year, homeowners may be curious about what that means for their borrowing potential and costs.
What the Fed’s rate pause means for home equity loan, HELOC rates
The federal funds rate affects how much it costs banks to loan out money and, in turn, how much they charge borrowers. When the Fed raises the federal funds rate, the interest rates on new home equity loans and HELOCs also goes up. Conversely, when the Fed lowers the federal funds rate, interest rates on home equity loans and HELOCs also decrease.
The Fed’s latest pause on interest rate hikes is good news for homeowners interested in taking out a home equity loan or HELOC, as it means they can take advantage of interest rates before another potential increase. Some experts we recently spoke with predict home equity rates will rise further before finally dropping in late 2024 and early 2025.
The pause is also good news for those who have already taken out a HELOC. While home equity loan rates are fixed when you take out the loan, HELOC rates vary over the course of your repayment based on the federal funds rate. A rate freeze means you won’t have to worry about paying more, at least in the short term.
What should you do now?
If you’ve been thinking of taking out a home equity loan or HELOC, now may be the time to do so.
“A rate pause can serve as an opportune moment for homeowners contemplating the refinancing of existing home equity loans or HELOCs,” says Mike Qiu, real estate agent and owner of Good As Sold Home Buyers. “This is especially pertinent for those with variable-rate loans, as they may have the chance to lock in a lower interest rate during this period of rate stability.”
That said, lenders are free to set their own rates, so it’s important to shop around and compare rates from different lenders to find the best deal. It’s also worth noting that the interest rate on a home equity loan or HELOC isn’t the only factor to consider.
“It is important to compare the interest rates when choosing a home equity loan or HELOC, but there are some other major considerations too,” says Theresa Raymond, principal broker and owner at TN Smoky Mtn Realty.
“First of all, you need to examine the loan terms,” Ramond says. “Determine the repayment period of your loan or line of credit, including the duration and payment frequency. Try to match the terms with your financial goals and situation to understand whether they are flexible enough or not. Then, you need to assess the associated fees and closing costs. These may include origination fees, application fees, appraisal fees, closing costs, etc.”
Another thing to keep in mind is that the value of your home can also affect your borrowing ability. If your home’s value has gone up, you may have more equity available to borrow against. Recent data from the St. Louis Federal Reserve shows that the average homeowner has about $200,000 in equity to tap into. So, if your equity is sizable, you may want to access it now before prices begin to fall.
The bottom line
The Fed’s rate pause is good news for homeowners who are contemplating a home equity loan or HELOC, as it means that they can still take advantage of low interest rates. However, it’s important to remember that interest rates could still go up in the future, so it’s essential to shop around and compare multiple lenders to find the best deal.
“Don’t settle for the first offer you receive,” Qiu advises. “Take the time to gather multiple loan offers from different lenders. This will enable you to compare them thoroughly and identify the most attractive terms.”