Impacts of Federal Reserve on Home Equity Lines of Credit (HELOCs) and Home Equity Loans

Impacts of Federal Reserve on Home Equity Lines of Credit (HELOCs) and Home Equity Loans

Fed's Interest Rate Calls Got You Scratchin' Your Head? Let's Break It Down (And Maybe Scratch Some Winnings Your Way)

The Federal Reserve is a powerful force when it comes to the rates you pay on your home's equity. Whether it's your home equity line of credit (HELOC) or a new home equity loan, their interest rate decisions can make your bills light as a feather or as heavy as a sack of bricks. Let's dive into the nitty-gritty of how the Fed's monetary policy dances with your home equity payments.

Fed Showdown: May 2025

Roll the dice! The Federal Reserve gathered once more in May 2025, declaring no changes to the interest rates on their Bingo cards. The policymakers are waiting for more data on inflation, the effects of tariffs, and the dance moves of Trump's administration. They'll be back on the dance floor again on June 17 and 18.

What's the Fed's Moves Got to Do With Your Home Equity Line of Credit and Home Equity Loans?

When the Fed does its money shuffle and changes the federal funds rate – the rate at which banks borrow from each other to meet their reserve requirements – it kicks off a rippling effect. A key casualty of this dance is the prime rate, which sits around three percentage points higher than the federal funds rate and tends to mimic its moves.

Many home equity lenders link the rates on HELOCs and home equity loans to the prime rate because, let's face it, HELOCs usually have a variable rate, and no one wants to miss a step in a dance. With the prime rate and federal funds rate leading the way, the cost of borrowing your HELOC can either party up or crash, leaving you left footin’ it.

But Home Equity Loans? They're just drifting through the party with fixed rates. They're not as prone to the Fed's dance moves because once you get your loan, that's it. Your rate will stay steady like a trucker on the highway. If you're on the hunt for a new home equity loan now, though, the rates you see are dancin' a Merengue with the federal funds rate.

Rate Shuffle–When's the Music Changing?

It happens faster than you can say "cha-cha-cha!" Current HELOC borrowers can expect their interest rates and bills to do the Salsa within a month or two after a Fed rate shift. The rate remains the same for current home equity loan borrowers, but the rates for new home equity loans will follow the Fed like a shadow.

"New offers for both products? The rates could change before you can say 'Fox Trot' after the Fed makes a move," explains Ted Rossman, senior analyst at our website. "It's all up to the lender, but when the market waltzes, they usually hop on the beat."

Already have a HELOC and haven't dipped your toe in? Rising rates won't sing that sad song to your wallet just yet. If you owe though, you'll be left with a larger monthly bill, usually within the next couple of billing cycles. This goes for both the draw and repayment phases.

If rates climb, why not give the Twist a shot to locking in a fixed rate on a chunk of your HELOC balance? This move isn't available with every lender, so watch your step, and there might be some strings attached.

Critical Fed Moves That Pulled at the Heartstrings (of Your Wallet)

Federal funds rate from 1981 to present## Time to Tango? HELOC or Home Equity Loan?

Although the Fed is giving us the Foxtrot on rates, their cuts in 2024 made home equity tapping cheaper. The average HELOC rate finished the year almost a full percentage point lower, according to our website's survey of lender partners[3]. Currently, HELOC rates are averaging 7.99% as of May 7, and are expected to glide away even lower[4].

Home equity loan rates may have taken a slower dance to the rhythm with a more modest decline, sitting around 8.36% on May 7. But they too are following the melody towards lower ground[4]. But remember, these rates are double what they were a few years back.

"This isn't the bargain-basement sale it was for the past twenty-plus years," says Greg McBride, the website's chief financial analyst. "Home equity rates are steep, so be sure to shop around to find the best dance partners. Homeowners are sitting on a money mountain, but this whole affair is getting pricey[4].

Before opening that HELOC, make sure you're comfortable with the maximum interest rate and the end of the draw period. And whether you're steppin' towards a home equity loan or a HELOC, and no matter the rate, think about borrowing within the context of your overall financial waltz, both present and future[5].

"It's important to consider your steps, think about what the money is for, and if waiting or choosing a different dance is the better move," Rossman says[3]. In the end, it's all about the rhythm, the ambiance, and dancing with your financial future in mind.

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1. The Federal Reserve's decisions on interest rates can significantly impact both the cost of borrowing for home equity line of credit (HELOC) and home equity loans, making bills lighter or heavier.
2. In May 2025, the Federal Reserve declared no changes to interest rates, citing the need for more data on inflation, tariff effects, and the administration's moves.
3. Changes in the federal funds rate can influence the prime rate, which frequently mimics its movements and affects HELOC rates, causing them to either decrease or increase.
4. Home equity loans with fixed rates are generally less influenced by the Fed's rate changes, as the interest rate remains steady for the loan's duration, but new loans will reflect any adjustments in the federal funds rate.
5. Current HELOC borrowers can expect their interest rates and bills to adjust within a month or two after a Fed rate shift, while rates for new home equity loans will follow the Fed's lead closely.
6. Homeowners considering a home equity loan or HELOC should shop around for the best rates and carefully consider their financial situation and future needs, as home equity rates are currently high compared to past years.

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