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When the Federal Reserve meets, we all have questions: What does it mean to me? Will my HELOC rate go up or down? Bankrate is here to help. We’ve looked at five categories — mortgages, home equity loans, auto loans, credit cards and certificates of deposit — to determine if the Fed’s moves made you a winner or a loser. Here’s a look at home equity loans:
Winner: HELOC borrowers
The Federal Reserve’s recent rate-cutting campaign has been a boon for anybody with a home equity line of credit.
As the federal funds rate has fallen, so have HELOC borrowing costs. HELOC rates typically are tied to the prime rate, which moves in tandem with the federal funds rate.
Recently, millions of homeowners have lost access to their HELOCs as faltering home prices and a surge in borrower defaults have caused lenders to freeze home equity lines of credit.
However, if you are among the lucky homeowners with access to your HELOC, the Fed’s latest inaction means borrowing costs will continue to stay low for a while longer.
Loser: Home equity loan shoppers
The Federal Reserve’s inaction will not directly impact home equity loan rates. Unlike HELOCs, loan rates generally do not move in tandem with the prime rate.
Nonetheless, in recent months, rates on home equity loans have climbed steadily and are now more than 25 basis points higher than their lows for the year.
This does not affect people with existing home equity loans, as rates on these products are fixed and — unlike HELOC rates — do not fluctuate.
However, homeowners shopping for new home equity loans will find borrowing more costly than it was earlier this year. Such rates are not likely to start falling simply because the Fed is keeping the federal funds rate low.
Borrowing costs on home equity lines of credit continue to hover a little north of 5.5 percent. HELOC interest payments are also tax-deductible, making the HELOC one of the most attractive ways to borrow at present.
However, HELOC rates generally move in tandem with the federal funds rate. Many market watchers believe that a combination of rising inflation and a falling dollar will cause the Fed to begin hiking rates sometime in the next several months.
If that happens, HELOC borrowers will see their interest rate — and their monthly payment — begin to rise.
The upshot? Go ahead and borrow from your HELOC, but do so judiciously. The costs you pay on the balance you carry are more likely to rise than to fall in coming months.