Borrowing Against Your Equity: HELOCs, Home Equity Loans…and Interest Rates

One of the opportunities you have as a deed holder is the ability to borrow against the home equity you build over the years.

But wait. How high is the interest rate you’ll have to pay? Is it worthwhile to pay that rate, in light of what the funds you borrow can do for you now?

A good borrowing strategy involves timing. At various times, the Federal Reserve ratchets bank rates up or down, and those federal actions (indirectly) press home loan rates higher or lower. Even if you don’t need a loan now, it’s good to review this dynamic as it plays out in home equity lines of credit (HELOCs) and home equity loans (HELs).

How’s the Fed Thinking About Rate Cuts Right Now?

The Fed aims to keep the lid on a 2% yearly inflation rate. But U.S. inflation has been significantly higher than that for three years running. So, as of now — July 2024 — signals from the Federal Reserve say the interest on loans will stay at today’s elevated rates.

Why the caution about cutting rates? The Fed fears lowering financing costs would stimulate the kind of buying sprees that push inflation up. We’re all holding our breath for the U.S. government to lower rates. But Federal Reserve Chair Jerome Powell wants assurances that inflation is really going down before coming through any rate cut(s) this year.

Recently (as of July 2024), federal policymakers have suggested they’ll want to lower banks’ lending rates by a quarter-percentage point by late 2024.

How Do Interest Rates Affect Home Equity Borrowers?

Let’s start with home equity lines of credit. Most HELOCs have variable interest rates. That means their interest rates change along with the federal bank rates.

Now, given the Fed’s indications lately (no changes in rates right away), we can expect the current HELOC interest rate to stick around for a while.

Other key factors include:

• The cap on the rate that the lender is allowed to charge you.

• How long you’ll get to draw from the loan, and when your repayment period will come.

• When you’ll pay interest — and when you won’t.

A cut at the Fed’s September meeting, if we get that, could lower the rates. We just need to wait and see. And yet, even when the expected rate cut(s) come this year, they’ll just be tweaks. Updates from the Federal Reserve this month show inflation is easing, but the Fed keeps on backing away from any cuts, let alone big ones.

As for home equity loans, their rates won’t change, once locked in. Home equity loans, like most mortgage loans, come with fixed rates. Take out the loan, and you’ve locked in your rate.

To benefit the most from borrowing, some people might wait for cuts before taking out a HEL. But no one can say with absolute certainty when the Fed will drop the rates down, so waiting isn’t a foolproof strategy.

Which Is Better? HELOC or Home Equity Loan?

Let your reason for borrowing guide the choice.

Bankrate’s chief financial analyst Greg McBride says HELOCs are best suited to projects that take some funds at various stages over time. And because it’s adjustable-rate borrowing, a home equity line of credit could be particularly timely in the second half of 2024. That’s because interest rates are slated to drop — even if only by a small amount.

In contrast, say your goal is to pay off your high-interest debt, such as credit card debt. If you’ll need to pay off what you owe in one fell swoop, then taking out a home equity loan could be the right move.

Because it’s adjustable-rate borrowing, a home equity line of credit could be particularly timely in the second half of 2024. That’s because interest rates are slated to drop — even if only by a small amount.

Also, with a HELOC, if you don’t need the full sum on your line of credit upfront, you can take what you need now and wait until rates drop to withdraw more. But a home equity loan could have the best average rate for the life of the loan. Ask your loan consultant to break it down for you when it’s time to borrow. At the time of this writing, HELOCs are averaging just under 9%, while 15-year HELs are under 8%.

So, Is Now a Good Time to Borrow Against My Home Equity?  

Borrowing rates have, for months now, stayed bound in a predictable range. Most (but now all) financial commentators believe that any rate movement during the rest of 2024 will be slightly downward.

There’s no hurry, most would say, to take out a loan right now. Most say rates will certainly not be ratcheted up sharply as they were in 2022.

On the contrary, most financial analysts still expect the rates charged by banks to go down this year. But the inflation data will inform the Fed how much and how soon the expected rate cuts can happen.

What’s the Most Important Advice for Anyone Borrowing Against Home Equity?

How about three general truisms — no matter where rates stand? Here they are:

1. With so much resting on the particular facts of your own situation, the best move is to talk with a financial adviser before borrowing against your home deed.

• Shop around with several lenders for the best rates, to make the most of your home equity loan or line of credit.

• Write down your plan to pay off the debt in advance. Stick to your plan. That’s the best way to deal with interest rates overall.

And there you have it: the interplay between the Fed’s interest rate decisions and a HELOCs or a home equity loan. We hope this overview gives you a helpful orientation to thinking about borrowing against what your home is worth. Because real estate represents a growing source of value, holding the deed to your home can mean having access to a helpful source of funds over the years.