Why you should borrow home equity before another rate hike

If it seems like every borrowing option is more expensive than it used to be — well, for the most part, it is. 

The Federal Reserve has increased its target federal funds rate range from near zero to more than 5% since March 2022. And because the interest charged on auto loans, credit cards, personal loans and more are tied to this rate — as it goes up, so does your cost of borrowing.

Amid high interest rates, homeowners do have one benefit — home equity loan and home equity line of credit (HELOC) interest rates tend to be lower than other options, since they're secured loans. In fact, top home equity rates today are around 7% to 8%, currently. 

But ahead of another Fed meeting, it could pay for potential borrowers to take action sooner rather than later. Below, we'll break down what to know if you're considering a home equity loan or HELOC before another potential rate hike.

Find the best home equity rates you can qualify for today here.

What another rate hike would mean for home equity rates

Even with less than a week until the Federal Reserve's next decision, it's not quite clear what they'll decide. The CME FedWatch Tool, a popular predictor of the Fed's next moves, currently gives a 27% chance there will be another rate hike. 

Meanwhile, signals from Fed officials have been mixed — with divergent calls for both another rate hike this month and pausing in June before reassessing later in the year. Fed Chair Jerome Powell most recently reiterated earlier comments that the decision would come down to an assessment of the data on a meeting-by-meeting basis. 

When the Fed hikes rates, it can affect nearly every type of borrower. So if rates do go up, it's likely that home equity loans and HELOCs will both get more costly. Looking back, you can see how that's already played out over the past year. Since the Fed began raising rates in 2022, average home equity loan rates have increased from around 6.20% to 8.30% APR and HELOC rates have gone from around 4% to 8.40% APR, according to Bankrate data.

Learn more about how you can get the best home equity rates here and start saving money.

Why you should borrow home equity before another rate hike

If you're thinking about borrowing from your home equity now, the best way to avoid the effects of another potential rate hike is by securing a home equity loan rate today. These loans carry fixed interest rates, so if you lock in a rate before another increase, your rate will remain the same throughout your loan term. 

As long as you're able to lock in a rate that you're satisfied with, and doesn't strain your budget, you can avoid fluctuations due to short-term rate changes. Plus, if rates go down in the future, you may be able to refinance your loan at a lower rate.

HELOCs, on the other hand, have variable interest rates. So even if you borrow now, before rates increase, your rate could still go up. In fact, HELOC borrowers may have already experienced this with previous rate hikes. "After rates have increased for the past couple years, your payment on your HELOC has also increased," says Eric Laub, CFP, founder of Finance 180. But when rates eventually go down, so might your HELOC rate. 

Before the next Fed decision, take time to consider whether borrowing from home equity is right for you. It can be beneficial for homeowners looking to use their increased home value as a way to access cash. Plus, there are potential tax incentives for using these loans for home improvements. But the long borrowing periods and need to secure the loan against your home could also be risky if you're not sure you can pay.

"Borrowing anything in high-interest environments is tough," says Max Pashman, CFP, founder of Pashman Financial, so you should be financially sound before taking on the added debt. Most importantly, be sure you understand exactly what your loan terms and requirements are before you sign — and how future interest rate changes could affect your repayment.

The bottom line

Homeowners are in a good position to score relatively low interest rates on home equity loans and HELOCs in today's high rate environment. But if the Fed decides to raise interest rates again, the rates on these products could increase, too. If you're considering borrowing, it could be worth locking in a home equity loan rate before a rate hike takes effect. If a HELOC is better suited for your goals, make sure you understand the ins and outs of how your rate may change before you borrow. 

Find out how you can score today's top home equity rates here.