With inflation cooling will home equity loan rates drop?
Today's inflation report suggests that the inflation rate in the United States is continuing to cool. Prices are 3.1% higher today than they were a year ago, down slightly from a 3.2% annual inflation rate last month.
Today's data isn't just a sign that price growth is slowing in the United States - it's also an important bit of information relating to the interest rate environment across the country. The Federal Reserve has maintained a relatively high federal funds rate target for a few months after raising its interest rate 11 times over the past two years. The central bank's interest rate decisions were made to hamper inflation - which seems to be happening.
The federal funds rate forms the basis for interest rates on a series of lending products, including home equity loans. So, does today's inflation data suggest that home equity loan rates will drop ahead? If so, how should you react if you plan on tapping into your home's equity?
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With inflation cooling will home equity loan rates drop?
"With inflation cooling, we won't necessarily see an immediate drop with home equity rates, but it's safe to say we can anticipate these rates dropping in the near future," says Darren Tooley, senior loan officer at Cornerstone Financial Services, in Southfield, Michigan.
He went on to say that "rates on most home equity products are directly tied to the federal funds rate, which is set by the federal reserve. Inflation numbers have been steadily declining since the spring, which has finally given the Fed pause and stopped them from increasing the federal funds rate." Tooley says that this news "leaves the door open to begin lowering interest rates in the near future."
But, lower interest rates in the near future won't do much for you if you need a home equity loan now. What should you do if you need to tap into your equity? Here are some options:
Refinance your home equity loan once rates drop
One option you have is to get your home equity loan now and plan to refinance it in the future when interest rates are lower. Here are a couple of factors to consider:
- The Federal Reserve isn't likely to reduce rates right now: Based on the data, it could be several months or longer before the Federal Reserve reduces interest rates. Sure, inflation is slowing, but it's still well ahead of the Fed's 2% target.
- The Federal Reserve moves gradually: When the Federal Reserve changes interest rates, it tends to do so gradually. Although small changes to your interest rate can have a large impact over the life of your loan, that impact probably won't be so meaningful in the short term. So, it may be better to tap into your home equity now and wait for a few rate reductions before you refinance.
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Opt for a HELOC over a home equity loan
If you're concerned about locking in today's interest rates with a home equity loan, but need access to your equity, consider a home equity line of credit (HELOC) instead. HELOCs are revolving credit lines that make it possible for you to tap into your home equity as needed for a predetermined period of time known as the draw period - typically between five and 15 years. During this period, you'll usually need to make interest-only payments. You'll generally start paying on your HELOC's principal balance after the draw period.
So, why might a HELOC be the better option as inflation cools? Because HELOCs typically come with variable interest rates rather than the fixed rates you'll usually pay on home equity loans. That means if you use a HELOC now, and interest rates fall, you'll likely benefit from lower interest charges in the future than if you had secured a home equity loan instead.
Why you shouldn't wait for lower rates to tap into your home's equity
Although it may be tempting to wait for interest rates to fall before you borrow against your home equity, it may not be the best idea. Here's why:
- The Federal Reserve isn't always predictable: Although some experts are predicting that lower interest rates are on the horizon, the Federal Reserve isn't necessarily predictable. Moreover, the inflation rate is still well above the Fed's 2% target. So, lower interest rates could be further off than you think.
- Your need likely can't wait: If you're thinking about borrowing against your home's equity, there's probably a good reason for you to do so. Maybe you want to pay off high interest rate credit card debt or you need to pay for repairs on your home. Whatever the reason might be, it's unlikely that you can wait several months, or even years, for a lower interest rate to kick in before you get your hands on the money you need.
- Even home equity loan interest rates don't have to be permanent: Sure, home equity loans usually come with fixed interest rates, but you always have the option to refinance if and when better rates come along.
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The bottom line
As inflation cools, the likelihood grows that home equity loan rates will fall in the future. However, inflation is still well above the Federal Reserve's 2% target and there's no reliable timeline for when rates might begin to drop. If you need access to your home's equity it may be wise to tap into it now and refinance your loan when rates fall. After all, it could be several months, a year or even longer before rates fall.
