What to do after the Fed's moves

Home Equity

The Federal Reserve's decision to cut rates by a half-point caught many people by surprise. The Fed was not scheduled to meet until late October, and no action had been expected before then.

However, the recent near-meltdown of the financial markets may have forced the Fed's hand.

A lower federal funds rate is good news for borrowers who use home equity lines of credit. Rates on HELOCs typically are tied to the prime rate, which moves in tandem with the federal funds rate.

So, if you need to borrow money, a HELOC may be your best option. Not only is the cost of borrowing now cheaper, but the interest associated with this type of borrowing is tax-deductible.

However, homeowners would be wise to borrow carefully. All signs point to coming economic hard times, and any type of debt can be toxic in such circumstances.

Bob Walters, chief economist at Quicken Loans, counsels American consumers hoping for a quick rebound of the financial system to be patient. "I don't think there is going to be some kind of a silver bullet," he says. "Some of this is just going to flat out take time."

Take-away

The Federal Reserve cut interest rates after leaving them unchanged for months. That means borrowing costs on home equity lines of credit -- which move in tandem with changes in the federal funds rate -- should fall.

The uncertainty surrounding the fate of the financial system -- and the U.S. economy -- means Fed rate hikes are exceedingly unlikely in the near future.

For this reason, HELOC borrowers should expect costs to remain low for some time.

Meanwhile, changes in the federal funds rate do not directly impact existing home equity loan rates (which remain fixed) or rates on new loans. However, these rates have been climbing in recent months and may continue to do so.

Confused about whether to refinance or take out a home equity loan? Learn more in the Bankrate article "Refinance vs. home equity loans."

Compare HELOC rates using Bankrate's calculator and learn more about how to deduct interest on home equity debt in the Bankrate article "Taxes on home equity."

-- Chris Kissell