What a rate pause means for home equity loan, HELOC rates

For the first time in 15 months, the Federal Reserve has paused interest rate hikes. It's welcome news for consumers who've watched their borrowing costs go up and their purchasing power go down as a result of persistent inflation and other economic woes.

But what does this mean for homeowners who've been considering tapping into their home equity with a product like a home equity loan or home equity line of credit (HELOC)? Or, for that matter, what does it mean for those who've already taken out one of these products?

We spoke to some experts to find out.

See what today's home equity rates are here to find out if it's right for you.

What a rate pause means for home equity loan, HELOC rates

The Fed's benchmark interest rate affects how much it costs borrowers to take out a loan or line of credit. The higher the interest rate, the more banks charge to take advantage of this and the more borrowers pay in interest.

For homeowners who've already taken out a HELOC, the Fed's rate pause means their payments should hold steady in the near future. While home equity loan rates tend to be fixed, HELOC rates vary based on the federal funds rate, so borrowers could finally enjoy a respite.

"Since the start of 2022, average HELOC rates have more than doubled, from a little over 4% to around 8.5% currently," says Deni Supplee, Realtor and cofounder of SparkRental. "The Fed pausing interest rates won't cause HELOC rates to drop, although the breather will hopefully stop their ascent. The prime loan rate — which most HELOCs use as an index for their pricing — may even dip a little in response to a rate pause."

A rate pause "should provide temporary relief to borrowers with outstanding HELOC debt who have seen their payments and interest really increase over this Fed tightening cycle," says John Boyd, CFP, founder and lead wealth advisor at MDRN Wealth.

For homeowners thinking about accessing their home equity to fund expenses, the rate pause suggests that if you take out a HELOC, your monthly payments won't increase the way they have been for existing borrowers. This could make it easier to plan for the future.

"With interest rates remaining unchanged during the pause, borrowers can experience stability in their monthly payments," says Mike Qiu, real estate agent and owner of Good As Sold Home Buyers. "This stability brings financial predictability, allowing homeowners to better plan their budgets and avoid unexpected payment shocks."

Since home equity loan rates tend to be fixed at the time you take out the loan, a rate pause simply means you'll be locked into today's rates, even if the Fed decreases rates in the future. Depending on your needs, this may or may not affect your decision to apply for one.

Explore your home equity options by comparing rates online today.

Should you get a home equity loan or HELOC now?

The federal benchmark interest rate is currently between 5% and 5.25%. So, what does that mean for you if you're wondering whether now is a good time to access your home equity?

If you need funds now, a home equity loan or line of credit still offers considerably lower interest rates than other financing options, such as credit cards and personal loans. So even if rates remain on the high side, your home equity may be your best bet, especially if time is of the essence and you can't afford to wait for a rate decrease.

"Regarding the Fed Funds rate, it is plausible that we have reached the peak. However, the duration of this pause becomes the critical question," says Boyd. "The Fed may keep rates paused but elevated for longer than the market currently anticipates as they address any persistent inflationary pressures."

It's also worth noting that CoreLogic recently reported that the first quarter of 2023 saw the first annual home equity loss in over 10 years. Since your home equity amount affects how much you can borrow, you might want to access your home equity now before it potentially declines further.

View current home equity rates now and see how much you could be eligible to borrow.

How to get the most from your home equity today

To maximize the benefits of a home equity loan or HELOC in today's rate environment, experts offer the following advice:

• Borrow responsibly: "Borrow only what is needed and ensure the loan payments align comfortably with your budget," says Qiu. "Assess the overall impact on your financial situation and weigh the associated risks of increased debt."
• Make sure you can afford the payments: Since your property serves as collateral for home equity products, it's essential that you ensure you can afford timely payments for the lifetime of the loan. "Don't expect rates to drop significantly over the next six months, or even the next year," says Supplee. "If you do want to draw on a HELOC, budget for high interest rates through 2024 at least."
• Comparison shop: Inflation may be cooling slightly, but it still remains a concern for borrowers. "When inflation is higher, lenders typically charge a higher rate to offset the risk of losing their money through devaluation caused by rising prices," says Matt Teifke, founder and principal broker of Teifke Real Estate. "If you're considering taking out a home equity loan or HELOC in an inflationary environment, you should know this consequence. So try to look around for the best possible rate."
• Consult a professional: There are many factors to consider when using your home equity, and current rates are just one of them. "If faced with complex financial circumstances or uncertainty, consulting a financial advisor can provide personalized guidance based on your unique situation," Qiu says.

Begin your search for a home equity loan or HELOC by comparing your options online now.

The bottom line

The Fed's interest rate pause could be a sign that the economy may be beginning to stabilize. But whatever the future brings, there are steps you can take today to access the funds you need as smartly and cost-effectively as possible. No one can predict the future, but by staying informed and carefully considering your personal financial situation, you can make the best decision for you at this point in time.