How the Federal Reserve affects HELOCs and home equity loans
The Federal Reserve’s interest rate decisions influence what you pay for variable-rate home equity lines of credit (HELOCs) and new home equity loans. Not you personally, of course — your own financials determine that — but the offers you’ll see lenders advertise, and the general rate trends. But how?
Let’s break down how the Fed’s monetary policy, announced in structured meetings throughout the year, affects how much it’ll cost you to borrow against the ownership stake you’ve built up in your home.
In its second meeting of 2025, held Mar. 18-19, the Federal Reserve left interest rates unchanged again. It’s taking a wait-and-see attitude as to how President Donald Trump’s administration’s policy changes on trade, immigration, fiscal policy and regulation could impact the economy.
“In deciding to keep its benchmark interest rate unchanged, the Federal Reserve acknowledges increased uncertainty about the outlook,” says Mark Hamrick, senior economic analyst at Bankrate. “At the same time, officials signaled that there could be a modest decline in rates this year, even while reducing their outlook for U.S. growth, and elevating the risk of persistent inflation.
“Like members of the Federal Open Market Committee, many consumers and business leaders are trying to process uncertainty, which undermines their confidence,” he adds. “Rates may or may not come down this year, but uncertainty has become a feature, not a bug of the economy.”
The Fed is next scheduled to meet May 6-7, 2025.
How does a Fed rate change affect home equity loans and HELOCs?
When the Fed changes the federal funds rate, the interest rate banks charge each other for overnight loans to meet reserve requirements, it affects other benchmarks — such as the prime rate, the interest lenders charge their largest, most favored clients. The prime usually runs 3 percentage points higher than the fed funds rate. When the fed fund rate moves, the prime rate moves up or down in tandem.
Many lenders directly tie the rates on HELOCs and home equity loans to the prime rate — often adding extra percentage points onto them — for the ultimate rate you, the borrower, pay.
Because HELOCs usually have variable interest rates, the cost of borrowing can rise or fall with the federal funds rate. If the fed funds rate goes up, your HELOC gets more expensive. When it falls, your HELOC gets less expensive.
Home equity loans, on the other hand, come with fixed rates, so they aren’t as deeply impacted by fed funds rate movement. Once you close the equity loan, your rate won’t change. But of course the rate you get on a new loan reflects the fed funds rate activity and its impact on the prime.
How soon do HELOC and new HELoan rates change after a Fed meeting?
Answer: pretty fast.
“For new offers on both products, rates could change right away after the Fed makes a move,” says Ted Rossman, senior industry analyst at Bankrate. “It’s up to the lender, but when the market changes, they tend to adjust pretty quickly.”
Existing HELOC borrowers should expect their rates to adjust within a month or two after a Fed rate move — with a corresponding change in their minimum monthly payments. Borrowers currently holding home equity loans won’t see any difference: Their rates are fixed, so payments won’t be affected after a Fed meeting. However, advertised rates for new home equity loans will reflect any monetary policy moves within a month or so.
If you already have a HELOC but don’t have a balance (in other words, haven’t drawn from it), rising rates won’t affect your wallet all that much. If you do owe, you’ll have a larger monthly payment to cover, usually within the next two billing cycles. This applies whether you’re in the draw or repayment phase.
If rates do rise, you might want to explore whether you can lock in a fixed rate on a portion of your HELOC balance. This isn’t an option with every lender, and there might be some limitations or fees if it is.
Key Fed moves that impacted home equity rates
Is now a good time to get a home equity loan or HELOC?
Following the Fed’s series of rate cuts in 2024, tapping home equity has gotten cheaper.
The average HELOC interest rate closed out the year almost a full percentage point lower, according to Bankrate’s national survey of lenders. This year, HELOC rates have fallen near a two-year low of 8.03 percent as of Mar. 19 and are forecast to retreat further in 2025.
Home equity loan rates have recorded a more modest decline, but at around 8.50 percent, are still trading at their lows for the year. They too are expected to continue on a downward course.
Still, these rates are double what they were just a few years ago. “This isn’t the low-cost source of funds it was for the better part of 20 years. Home equity rates are high, so be sure to shop around to seek out the best offers,” says Greg McBride, chief financial analyst at Bankrate. “Homeowners are sitting on a mountain of home equity but borrowing against it is pricey, so be diligent in doing so.”
Home equity loan shopping tips
Before you open a HELOC, understand the maximum interest rate, when the draw period ends and whether you’re responsible for interest payments only (or not) during this period.
Whether you opt for a home equity loan or a HELOC, and whatever the interest rates, Rossman says homeowners should consider borrowing in the context of their overall finances, both present and future. “It’s important to think through what you’re going to use the money for and if you’re better off waiting or taking out a different type of loan,” he says. “Think through the alternatives and what your payback schedule is going to look like.”
