W
ith 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:
Wait if you can. If the economy continues to languish, the Fed might cut interest rates when it meets Jan. 28 and 29 for the first of its eight meetings next year. If the Fed cuts rates next month, the prime rate will drop and so will rates on home equity loans. Even if the Fed doesn’t cut rates again, a rate increase is unlikely until sometime around the middle of 2003.

If you can’t afford to wait, and you need to take out a home equity loan now, 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 7.87 percent on Dec. 4.
Use
Bankrate’s home equity loan search 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 in January, 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, but because the rates adjust with the prime rate, they’re at or near their lowest point. Consider getting a home equity loan instead of a line of credit. You’ll pay higher interest initially on a home equity loan, but the rate won’t go up. The rate on a home equity line of credit will rise eventually — probably higher than the rate on today’s home equity loans.

Equity line of credit rates averaged 4.81 percent on Dec. 4. Search for the
best HELOC rate in your area.

— Posted: Dec. 10, 2002