Experts Expect a ‘Domino Effect’ to Push Home Equity Loan and HELOC Rates Up After the Fed Meeting

An image of a home with money underneath it is used to illustrate an article about home equity loan and line of credit rates. Credit: Getty Images
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The Federal Reserve is expected to raise interest rates again this week as it tries to slow inflation, and experts anticipate home equity loan and line of credit (HELOC) rates will keep rising with it. 

With the Consumer Price Index showing inflation at 8.2% year-over-year in September, experts expect the Fed will go forward with an increase of 75 basis points to their benchmark, short-term interest rate, the federal funds rate. That would be the Fed’s third 75-basis-point hike in a row. 

Even though homeowners are sitting on record amounts of equity, the Fed’s rate hike will make tapping into it more expensive.

“And that’s really the whole point of what the Fed is doing. They’re trying to discourage borrowing. They don’t want people taking out loans or tapping into their home equity,” says Karl Wagner, partner at Biondo Investment Advisors. “They want people to sit tight, tighten their belts, and put these things off.” 

Here’s what experts expect this week’s rate hike means for home equity loans and HELOCs.

Experts Predict: What Another Rate Hike Means For Home Equity Loan And HELOC Rates 

Vikram Gupta

Vikram Gupta, executive vice president and head of home equity at PNC Bank

“The market suggests it’s going to be a 75 basis point increase because inflation has yet to turn. There’s going to be a domino effect. When the Fed raises their rate, it trickles down to the prime rate – which determines the cost of borrowing for consumers.” 

Jamie Hopkins

Jamie Hopkins, managing partner of wealth solutions at Carson Group

“There’s some conversation that a bit of the rate hike is already built in – maybe 30 or 40 basis points. I don’t think we’ll see a jump overnight but I can see some of the rates for a HELOC or home equity loan going to 6.5% or 7%.”

Jacob Channel

Jacob Channel, senior economist at LendingTree

“Another 75 basis point increase is pretty likely. As a result, we’re almost certainly going to see the rates on home equity loan products increase. I think that 7.5% is a reasonable prediction, with the caveat that it can vary pretty significantly from borrower to borrower.” 

What Is Affecting Home Equity Loan and HELOC Rates Right Now?

Back in March, the Fed introduced its first rate hike in more than three years. At their November meeting, the Fed is expected to implement its sixth rate increase of the year. This is all a part of their ongoing effort to tamp down inflation. 

“Inflation is one of those things where even if you can’t define it, you know what it is. Presumably, you go to the grocery and realize your bills are higher than they were despite the fact you’re not buying anything new,” says Channel. 

Increases to the federal funds rate make it more expensive for banks to borrow money. While it’s not a rate consumers pay, the Fed’s actions still affect household budgets by raising costs for lenders, who pass them along to borrowers. 

Many homeowners with HELOCs, which often have variable interest rates tied to the prime rate, will see immediate increases in their monthly payments. For homeowners looking to get a home equity loan, they will also likely be met with higher rates. However, because home equity loans typically have fixed interest rates, if you have an existing home equity loan, odds are you won’t see any changes to your monthly payments. 

Pro Tip

The Fed’s rate hikes mean savings rates are also on the rise. Before borrowing against your home with a home equity loan or HELOC, now is a great time to ensure your emergency savings are adequately funded.

Experts’ Advice for Homeowners

Tapping into your home equity can still be a cheap and effective way to access capital. Whether you’re looking to consolidate debt or take on a home improvement project, home equity loans and HELOCs might be your best bet. 

Prior to the COVID-19 pandemic, mortgage refinancing was very popular. Home prices were increasing and borrowers were able to lock in a lower rate and make a dent in their debt payments by refinancing. In today’s inflationary environment, refinancing is a less popular option because mortgage rates have gone up so much. Consumers are reluctant to give up their lower interest rate in a cash-out refinance just to tap their equity.

“Home equity is the only game in town now,” says Gupta. “The opportunity to refinance to a lower rate just doesn’t exist anymore. That party has ended.” 

You always want to be strategic about borrowing against your home, but especially in a rising rate environment. 

Experts recommend shopping around for lenders to see who can offer you the best rate. You can get an interest rate that is higher or lower than the average depending on your individual financial situation. 

Beyond having a clear purpose for your loan or line of credit, you’ll want to ensure that you can afford the monthly payments. If you default on payments, you run the risk of losing your home.

With talk of a recession looming, prioritize building an adequate emergency fund before taking out a home equity loan or HELOC.