The Federal Reserve has finally started slashing interest rates, giving some hope to homeowners looking to tap their property’s value with a home equity line of credit (HELOC). The Fed’s moves have already begun to have an impact, with HELOC rates moving below 9 percent for the first time in more than a year.
With more interest rate cuts potentially on the horizon, all eyes are on HELOC rates’ next move. Will they continue to fall with the autumn leaves?
What’s the outlook for HELOC rates?
In September, the Fed slashed interest rates by half a point, its first cut since the COVID-19 pandemic. As a result, HELOC rates, which typically follow the Fed’s lead, began to drop, falling to their lowest points in a year in early October.
“The rates on existing borrowers’ HELOCs will shadow the Federal Reserve’s interest rate cuts, typically with a one-to-two month lag,” says Greg McBride, chief financial analyst at Bankrate. McBride adds that the Fed is expected to cut rates at least once more by year-end. As a result, HELOC borrowers should see a corresponding decline in their rates, with promotional offers — for a lower-than-market rate for the first several months — potentially sweetening the deal for new borrowers.
The big question now is: How low can HELOC rates go? Mark Hamrick, senior economic analyst at Bankrate, predicts that “homeowners could see HELOC rates fall below 8 percent by the end of the year.” However, he stresses that borrowing costs are unlikely to return to the rock-bottom rates we saw around the Great Recession, when they dipped below 5 percent, and during the pandemic, when they fell as low as 3.86 percent.
McBride points out HELOC variable rates may drop more quickly than fixed home equity loan rates and also credit card rates.
Since they’re unsecured — not backed by any collateral — credit cards charge much higher interest than HELOCs do. In the most recent week, the average credit card interest rate clocked in at 20.53 percent, close to a record high.
What influences HELOC rates?
HELOC rates mostly follow the prime rate, which is impacted by the Federal Reserve’s monetary policy moves. When the Fed cuts its benchmark federal funds rate, HELOC rates typically drop, and when the Fed raises rates, the opposite usually happens — they increase.
Of course, the Fed doesn’t operate in a vacuum. And Sarah Alvarez, vice president of mortgage banking at William Raveis Mortgage, points out that some market factors, namely a stronger-than-expected economy and geopolitical events, could slow down expected rate cuts and a decline in HELOC rates.
“Economic data suggesting a strong jobs report has roiled the markets with concerns that the war in the Middle East has the potential to be inflationary, especially when considering oil prices,” she says. “Now, it seems likely the [Fed’s next] cut may be a quarter point instead, although that can change depending on what tomorrow’s news brings.”
Is now a good time to get a HELOC?
With HELOC rates at their lowest levels in more than a year, is it time to jump on the HELOC bandwagon?
Despite the dramatic drop, it’s important to keep things in context. Even bouncing around the 8-9 percent range, a home equity line of credit is not exactly a low-cost source of funds. Nor will it become one in the near future, even with future declines: “HELOC rates will go from ‘high’ to ‘not as high,”’ as McBride puts it.
While rates are still high compared to pre-2023 levels, though, some experts say a HELOC could be worth considering—especially if you’ve built up a significant ownership stake in your home, as many U.S. homeowners have done. CoreLogic reports that in the first two quarters of 2024, home equity levels continued to rise, with the average mortgage-holding homeowner now sitting on more than $300,000 in equity. After three consecutive quarters of slowing, home equity lines of credit originations — that is, people establishing new HELOCs — turned upwards in the same period, too, according to a study by trade journal Home Equity Lending News.
“Many people have been taking advantage of HELOCs even through the higher rate cycle,” says Brian Grzebin, President of Mortgage Banking at Univest Bank and Trust. “Due to historic home price appreciation, HELOCs are an easy way to tap that home equity. Most HELOCs are tied to the prime rate, which moves down with Fed cuts, so it would be a good time for anyone wanting to pay off high credit card debt, renovate their home, or make a big purchase that would otherwise have a higher rate.”