Homeowners

Planning Home Renovations? Getting a HELOC Just Became Cheaper

If you’ve been waiting for interest rates to fall before starting that big home renovation or making a large purchase, get the confetti ready.

Interest rates for Home Equity Lines of Credit (HELOCs) are expected to fall after the U.S. Federal Reserve lowered its benchmark rate on Sept. 17. That could make it a whole lot cheaper for people to tap into their home equity.

While the interest rates for HELOCs are different from the Fed’s rates, HELOC rates generally move in lockstep with the Fed’s rates. So, if the Fed continues to lower rates, then HELOC rates could continue to go down.

“HELOC interest rates almost always fall shortly after the Fed’s rates drop,” said Ray Williams, executive vice president, Consumer Direct Division at New American Funding.

He anticipates borrowers who currently have HELOCs could experience payment relief in one or two billing cycles.

“The Fed’s base rate affects credit cards, auto loans, and Home Equity Lines of Credit,” said Norm Blaskoski, branch manager with New American Funding in Eagle, Ind. If the Fed continues to bring rates down, that “will have a huge impact on what the customer pays.”

How do HELOCs work?

A Home Equity Line of Credit is a revolving line of credit secured by your home’s equity. (Equity is the difference between what you owe on your home and how much your home is worth. It increases as you pay down the balance on your loan as well as when your home value rises.)

The loans are similar to credit cards. They come with a limit to how much money you have access to, which is based on how much home equity you have. And borrowers only use what they need.  

Borrowers only pay interest on the amount of their credit line they use, not what they have available. And HELOCs have much lower interest rates than credit cards.

This can make it more affordable to make repairs, do home renovations, pay for emergencies, college tuition, or celebrations, or even go on that big vacation.

Homeowners can access the cash during the draw period, generally lasting five to 10 years. Then they pay it back over the next 10 to 20 years, depending on the terms of the loan.

Why should homeowners consider a HELOC?

HELOCs provide a way for homeowners to tap into their home equity without having to get a new mortgage with a new mortgage rate. HELOC rates are typically slightly higher than mortgage rates, but they also come with a few perks.

Homeowners are also often able to deduct the interest they pay on a HELOC from their taxes.

And if the Fed lowers rates multiple times this year and next, HELOC rates are likely to continue to come down.

HELOCs are available as adjustable-rate and fixed-rate loans, but adjustable-rate HELOCs are more common.

“A Home Equity Line of Credit is a good safety blanket to have,” Blaskoski says. “You can have it open and only use it when you need it.”

Norm Blaskoski NMLS # 918988 

Ray Williams NMLS # 270010