How Fed Moves Impact HELOCs, Home Equity Loans

Image by Chorna Olena/Getty Images; Illustration by Austin Courregé/Bankrate

The Federal Reserve’s interest rate decisions influence what you pay for variable-rate home equity lines of credit (HELOCs) and new home equity loans. Let’s 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 3 percentage points higher than the fed funds rate, and tends to parallel its moves.

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 one can rise or fall with the prime rate and fed 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 equity 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 reflect any Fed change fairly quickly, as well.

“For new offers on both products, rates could change right away after the Fed makes a move,” says Ted Rossman, senior industry analyst at Bankrate. “It’s up to the lender, but when the market changes, they tend to adjust pretty 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. This isn’t an option with every lender, though, and there might be some limitations or fees if it is.

Key Fed moves that impacted home equity rates 

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

The September rate cut marks the first reduction in nine months, and that could make borrowing against your home’s value cheaper. Last year, the average HELOC rate closed out 2024 almost a full percentage point lower, according to Bankrate’s national survey of lenders. Currently, HELOC rates were averaging 8.05 percent as of September 17. At the same time, home equity loan rates were averaging 8.28 percent, both near their lows for the year.

But as Rossman notes, while home equity borrowing rates have come down a bit, they’re still much higher than they were a few years ago. At the same time, many homeowners are finding themselves with “golden handcuffs” on their properties.

“Home values are up, and a lot of homeowners are sitting on valuable equity,” he says. “Moving is a hassle, and whatever you buy is probably going to cost more, with a higher interest rate than your current mortgage, so it might make sense to renovate in place.”

While necessary home improvements are one thing, Rossman says homeowners should be cautious about using their home equity to pay for discretionary purchases. “Buying a boat or going on vacation? Perhaps not so much,” he says. Even debt payoff can potentially be risky. “You’re exchanging unsecured credit card debt for a loan that puts your home on the line. But, if you’re doing it for the right reasons, home equity borrowing is worth considering.”