Best moves to make now: Home equity products

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With the Fed standing pat on short-term rates, what are the smart moves for you to make?

Home equity loans:
Home equity loan rates tend to follow the prime rate, though rates on longer-term loans (those with terms of 10 years or 15 years, for instance) behave more like long-term, fixed-rate mortgage rates.

Best move now:
It’s anyone’s guess what the Fed will do in its next couple of meetings. Maybe it will cut short-term rates in reaction to events in Iraq. Maybe the economy will go into recession again. If the Fed cuts short-term rates, the prime rate will drop and so will rates on home equity loans.

On the other hand, the situation in the Middle East (and North Korea) might be resolved satisfactorily, and the economy suddenly could go gangbusters, and the Fed would be tempted to tap the brakes by raising short-term rates. Few economists and investors expect the Fed to raise rates anytime soon, though — it might not happen until next year.

Bottom line: Don’t time your home equity loan based on guesswork about what the Fed might do this year. If you need to get a home equity loan, go ahead.

Even if rates drop afterward, you can relax knowing that you still got a good rate by historical standards. Equity loan rates averaged 7.56 percent March 12. Use
Bankrate’s home equity loan search engine to find the best rates in your area. You’ll find the lowest rates on the shortest-term loans (say, three to five years).

Home equity lines of credit:
Most equity lines of credit feature variable rates and payments tied to the prime rate, which moves up and down with Fed rate actions.

Best move now:
Even if the Fed cuts rates later this year, your monthly payment on a home equity line of credit might not decline if it has a minimum interest rate or a minimum monthly payment. Check the loan paperwork and see.

Home equity lines of credit tend to have lower rates than home equity loans. Because the rates adjust with the prime rate, they could fall again later this year if the Fed cuts short-term rates. Eventually — maybe next year — rates on home equity lines of credit could rise higher than the rate on today’s home equity loans. But that might take a while.

Equity line of credit rates averaged 4.79 percent March 12.
Search for the best HELOC rate in your area.