If you have a home equity line of credit (HELOC), payment relief may finally be here.
The Federal Reserve is expected to make a decision today, which means it will shift from a tight monetary policy to an easing one.
In other words, they will start lowering prices instead of raising them!
While this will not have a direct impact on long-term mortgage rates, it does directly affect loans tied to the prime rate, including home equity lines of credit.
This means that your HELOC rate will fall by the amount of any cuts the Fed makes. So if the central bank cuts 25 basis points today, your HELOC rate will be adjusted by 0.25%.
While a single cut is unlikely to provide much relief, there are expectations that this is the first of many, with rates likely to be cut by about 200 basis points over the next 12 months.
So, if you have the option to “lock your HELOC rate,” it’s probably best to avoid it altogether.
How are HELOC rates determined?
As a quick reminder, HELOCs are variable rate loans, which means they can adjust each month based on the prime interest rate.
To get your HELOC rate, you combine the HELOC margin, which is fixed, and the prevailing prime rate, which moves in sync with the federal funds rate.
When the Federal Reserve decides to raise or lower the federal funds rate (FFR), the base rate will also rise or fall by the same amount.
Since early 2022, the Federal Reserve has raised the federal funds rate 11 times, from near zero to a range of 5.25% to 5.50%.
Today, the central bank is expected to cut its key interest rate by 25 or 50 basis points. This means that banks will cut their key interest rate by the same amount shortly after.
Quick note: The Fed does not control long-term mortgage rates, so its actions today will not directly affect the 30-year fixed rate. If it lowers the 30-year fixed rate, today’s fixed rate may rise!
Anyway, let’s say you have a margin of 2% and the base interest is currently 8.50%. That means your HELOC rate is 10.50%. How sad!
But if the Fed cuts rates by 25 or 50 basis points today, that rate will drop to 10.25% or 10%. Well, we’ve reached a point.
The rate is still not low, although it will not eventually rise, in fact it is falling.
Now, if we add another 200 basis points of discount, the rate drops to 8%. Wow, that could actually result in some nice interest savings and lower monthly payments!
What is your HELOC lock anyway?
This brings us to the “home equity line of credit lock.” As we mentioned, home equity lines of credit are variable rate loans.
But sometimes banks give you the opportunity to lock in your interest rate for the rest of the loan term. This happened to my friend, who asked me today if he should lock in his interest rate.
This only happens after you have had the HELOC open for a certain period of time and are making withdrawals from it. It is not upfront, otherwise it would simply be a fixed loan on the equity in the home.
So Bank X might say, hey, we know that rates are going up and there’s a lot of uncertainty out there.
If you don’t want to deal with any further adjustments, you can lock in the price you currently have.
This may sound like a good idea to those who don’t pay attention to the Fed. After all, many homeowners are risk averse, which is why they don’t tend to take on adjustable-rate mortgages either.
Many borrowers may not actually be aware that their home equity line of credit was variable from the start.
They may take the opportunity to take advantage of the interest rate lock-in offer and stop worrying. But this may actually be a very bad time to do so.
You’ve watched helplessly as your mortgage has appreciated over the past two years. Now you plan to secure it when rates are finally set to drop?
This may not be a good idea. It would benefit the bank, which would make much less money if it did nothing and let the interest rate fall as the base rate falls lower and lower over the next 12 months.
If you are interested in knowing the expected direction of the base interest rate, keep an eye on the federal funds rate forecast. A good place to do this is CME website.
They currently expect the base rate to fall to 2.25% by September 17, 2025, as shown in the table above.
In other words, if you have a home equity line of credit set at 10% today, it could be 7.75% in 12 months. Don’t lock in a 10% rate and miss out on those savings!
Prior to creating this site, I worked as an account manager for a wholesale mortgage lender in Los Angeles. My experience working in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and current) home buyers better navigate the home loan process. Follow me on Twitter for the latest news.
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