How much further can HELOC interest rates fall? Experts weigh in
A home equity line of credit (HELOC) is a built-in borrowing tool that homeowners with enough equity can access. This line of credit offers a way for homeowners to borrow against their home equity at an affordable rate, and the good news is that borrowing conditions are becoming even more favorable as HELOC interest rates are following a downward trajectory.
Though HELOCs have variable interest rates and are subject to change, there have been numerous drops in HELOC borrowing rates recently. The average rate on a HELOC is now 8.03% — a two-year low.
Will that downward trend continue, though? We spoke to home lending experts about where HELOC rates might be headed and what home equity borrowers should know.
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How much further can HELOC interest rates fall?
The most recent Federal Reserve meeting in March resulted in no changes to the federal funds rate. In a statement, the Fed noted that elevated inflation and an increase in economic uncertainty were cited as reasons for keeping the rate the same.
The federal funds rate impacts rates on loan products, including HELOCs. As a result, the experts we spoke to think that HELOC rates are also likely to hold steady for now — but with potential drops of up to half a percent later this year.
"So I think in the short term they're going to stay where they are because I think they're waiting to see what will happen with tariffs and how that will affect the economy. But I do think by the end of the year, I'm anticipating rates coming down by about half a percent," says Jordan Heatherly, a mortgage loan originator at Churchill Mortgage.
While significant HELOC rate drops might be further away, the experts we spoke to don't anticipate HELOC interest rates to head in the other direction, which is good news for borrowers.
"Any HELOC rate drops will happen lock-step with any changes the Fed makes to the Fed funds rate…It seems unlikely at this time that the Fed will raise rates; however, it will likely take longer than everyone had hoped to achieve a more normalized market, similar to what we experienced before the pandemic," says Sarah DeFlorio, vice president of mortgage banking at William Raveis Mortgage.
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What needs to happen for HELOC interest rates to drop further?
Inflation has many Americans feeling the pinch, and higher interest rates lead to higher borrowing costs. During this wait-and-see moment, it's normal to wonder when HELOC interest rates will drop. For that to happen, it's more of an art than an exact science.
"We need to see that the Fed is confident that they have successfully mitigated inflation. It will probably take longer now due to the unknown impacts of tariffs and other potentially inflationary policies and macro events, including the ongoing wars in the Middle East and Europe," says DeFlorio.
How borrowers can benefit from a HELOC
If you want to borrow from your home's equity, you typically have three options: a home equity loan, a cash-out refinance or a HELOC. Home equity loan rates have an advantage in terms of offering borrowers fixed interest rates, which can be more beneficial in an uncertain rate environment, as the rates, and therefore the payments, stay the same unless you refinance the loan.
A cash-out refinance lets you tap into your equity by borrowing more than your existing mortgage. It pays off your existing mortgage and you can "cash out" the rest, replacing your old mortgage loan with a new one at today's rates. Going this route may not be ideal in a high-rate environment, though, especially if you're one of the lucky ones with a low mortgage rate. More than half of mortgage borrowers have interest rates below 4%, according to a report from Realtor.com. Compare this to current 30-year fixed mortgage interest rates which are below 7%, according to Freddie Mac.
Heatherly notes that HELOCs are a particularly attractive form of home equity borrowing right now because you don't touch your first mortgage, unlike a cash-out refinance, which replaces your existing mortgage. And while HELOC interest rates aren't rock bottom, they're still lower than other loan and credit products. So are home equity loan rates.
"When you look at home equity rates versus credit card rates versus personal loan rates, you know home equity beats it almost every time," says Jeff Ruben, president of WSFS Mortgage.
Credit card debt in particular comes with steep rates. In the current environment, that could be higher than 20%, but current and prospective HELOC borrowers stand to benefit from the current environment and in the future when rates drop. Because HELOC Interest rates are variable, they may become more favorable throughout the year, which can help you save on borrowing costs.
The bottom line
If you've amassed equity in your home, you have various options if you want to put it to good use. A home equity line of credit can be appealing due to its flexibility and its ability to keep your current mortgage rate intact. You can shop around with multiple HELOC lenders to see what you qualify for. It could be a good time to take this route, too, as HELOC rates have dropped in the last year. While there is currently some uncertainty about what's ahead, for now, it seems rates may continue to fall later this year.
