How the Federal Reserve affects HELOCs and home equity loans

The Federal Reserve’s interest rate decisions influence what you pay for new home equity loans and variable-rate home equity lines of credit (HELOCs). Here, we break down how the Fed’s monetary policy affects how much it’ll cost you to borrow against your home.

How do Federal Reserve decisions affect HELOCs and home equity loans?

When the Fed changes the federal funds rate — the interest rate banks charge each other for overnight loans to meet reserve requirements — it affects other benchmarks, including the prime rate. The prime rate usually runs three percentage points above the fed funds rate and tends to move in step with it.

Many home equity lenders directly tie the rates on HELOCs and home equity loans to the prime rate. Because HELOCs often have variable interest rates, the cost of borrowing can rise or fall with the prime rate and federal funds rate — making your HELOC more or less expensive.

Home equity loans come with fixed rates, so they aren’t as deeply impacted by Fed decisions. Once you close the loan, your rate won’t change. If you’re thinking of getting a new home equity loan now, however, the rates you see are influenced by the fed funds rate.

How soon do HELOC rates change after a Fed meeting?

It happens relatively fast. Current HELOC borrowers can expect their interest rate and payments to adjust within a month or two after a Fed rate change. Current home equity loan borrowers won’t see any difference, as their rate and payments are fixed. However, the rates advertised for new home equity loans will also reflect any Fed changes fairly quickly.

If you already have a HELOC but haven’t drawn from it, rising rates won’t affect your wallet all that much. If you do owe, you’ll have a larger monthly payment to cover, usually within the next two billing cycles. This applies whether you’re in the draw or repayment phase.

If rates do rise, you might want to explore whether you can lock in a fixed rate on a portion of your HELOC balance. But this isn’t an option with every lender, and if it is, there might be some limitations or fees.

Key Fed moves that have impacted home equity rates

Home equity rates typically follow the Fed’s interest rate moves, but influence HELOC rates more directly. During the COVID pandemic, the Fed slashed rates to near zero to stabilize the economy. As a result, HELOC rates dropped sharply in 2021, reaching record lows, falling below 4%.

Is now a good time to get a HELOC or home equity loan?

While home equity loan and HELOC rates are at their highest levels this year, they are still the cheapest they’ve been in more than three years. Still, deciding whether to tap into your home equity is a personal decision and shouldn’t just be driven by rates.  

“If you absolutely have to tap into your home’s equity because of an individual’s needs, then that is certainly one resource,” says Josh Rubin, real estate agent at Douglas Elliman, a real estate company based in New York City. “But to look at your home as a proverbial piggy bank for a less critical need, i.e., a second car, a second home, a luxury vacation, jewelry, or clothing items? I wouldn’t recommend going into debt for those items now.”

He says one instance in which borrowing against your equity might make sense is when you are replacing high-interest debt with lower-interest debt. 

“Let’s say you have a student loan at some egregious rate, a consumer loan or some type of debt instrument that is in the double digits,” he says. “If you can transfer that to home equity for single digits, then it makes sense, because then you’re saving a significant amount.”