How Fed Moves Impact HELOCs, Home Equity Loans

Image by Chorna Olena/Getty Images; Illustration by Austin Courregé/Bankrate

The Federal Reserve’s interest rate decisions influence what you pay for new home equity loans and variable-rate home equity lines of credit (HELOCs). Here, we break down how the Fed’s monetary policy affects how much it’ll cost you to borrow against your home.

How do Federal Reserve decisions affect HELOCs and home equity loans?

When the Fed changes the federal funds rate — the interest rate banks charge each other for overnight loans to meet reserve requirements — it affects other benchmarks, including the prime rate. The prime rate usually runs three percentage points above the fed funds rate and tends to move in step with it.

Many home equity lenders directly tie the rates on HELOCs and home equity loans to the prime rate. Because HELOCs often have variable interest rates, the cost of borrowing can rise or fall with the prime rate and fed funds rate — making your HELOC more or less expensive.

Home equity loans come with fixed rates, so they aren’t as deeply impacted by Fed decisions. Once you close the loan, your rate won’t change. If you’re thinking of getting a new home equity loan now, however, the rates you see are influenced by the fed funds rate.

How soon do HELOC rates change after a Fed meeting?

It happens relatively fast. Current HELOC borrowers can expect their interest rate and payments to adjust within a month or two after a Fed rate change. Current home equity loan borrowers won’t see any difference, as their rate and payments are fixed. However, the rates advertised for new home equity loans will reflect any Fed change fairly quickly, as well.

“For new offers on both products, rates could change right away after the Fed makes a move,” says Ted Rossman, senior industry analyst at Bankrate. “It’s up to the lender, but when the market changes, they tend to adjust pretty quickly.”

If you already have a HELOC but haven’t drawn from it, rising rates won’t affect your wallet all that much. If you do owe, you’ll have a larger monthly payment to cover, usually within the next two billing cycles. This applies whether you’re in the draw or repayment phase.

If rates do rise, you might want to explore whether you can lock in a fixed rate on a portion of your HELOC balance. This isn’t an option with every lender, though, and there might be some limitations or fees if it is.

Key Fed moves that have impacted home equity rates

Home equity rates typically follow the Fed’s interest rate moves, but influence HELOC rates more directly. During the COVID pandemic, the Fed slashed rates to near zero in an effort to stabilize the economy. As a result, HELOC rates dropped sharply in 2021, reaching record lows, falling below 4%.

Is now a good time to get a HELOC or home equity loan?

Home equity loan and HELOC rates are currently at three-year lows, making home equity borrowing more attractive. However, Stephen Kates, financial analyst at Bankrate, puts the decline in context:

“Their rates still sit far above risk-free cash, Treasury yields or fixed-rate mortgages,” Kates says. “These products add a second lien on the home, which is a riskier prospect for the lender in the case of a foreclosure. Even in a year with falling rates, the rates remain higher than other forms of secured lending.”

The Fed’s interest rate decisions will influence where home equity rates head next. “Until the Fed can confidently signal that inflation is trending downward, we aren’t likely to see another rate cut,” says Kates. That makes deciding when to tap your home equity tricky, as there’s no guarantee that rates will fall in the near term.

“Homeowners planning a project or large expense that could be funded with a HELOC should carefully review their borrowing options,” he says. “Using a HELOC today requires the understanding that rates may not fall quickly, so borrowers should not rely on future rate declines to make payments more affordable. If the payments fit comfortably within the budget, a HELOC can be a useful tool that preserves flexibility and allows other cash reserves to remain intact.”