If you’re thinking about applying for a home equity loan or home equity line of credit, don’t wait much longer. Interest rates are still low, but they’re rising.
The Federal Reserve increased the federal funds rate by a quarter percentage point at its March meeting, and the central bank is expected to approve two more rate hikes in 2018. This means the cost of borrowing money is getting more expensive.
Variable interest rates tied to the prime rate are going up, too. The prime rate published by The Wall Street Journal is one of the most widely used benchmarks for setting HELOC rates.
If you’ve borrowed against the equity in your home, it’s going to cost you more to pay it off. Same with your credit cards, which also carry variable rates.
Greg McBride, CFA, Bankrate’s chief financial analyst, has predicted three Fed rate hikes for 2018. For HELOC borrowers, this could mean a bump of 75 basis points.
“Every quarter-point move by the Fed directly translates into a quarter-point increase in the rate on your home equity line, and it tends to show up within a couple of statement cycles,” McBride says.
Have a strategy for paying home equity debt
McBride advises homeowners to have a plan for managing their home equity debt in a rising rate environment.
“Refinance into a fixed-rate home equity loan; ask your lender to freeze the rate on your outstanding HELOC balance; or refinance into another HELOC to start the draw period clock all over again.
“The increase in rates is compounding the issue of HELOC borrowers coming to the end of their draw period and seeing their payments jump as the line of credit switches into repayment mode. Together it’s a double whammy,” McBride says.