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The Federal Reserve opted for a rate cut last month, and more reductions could be on the horizon as 2025 approaches.
So far, this decision has led to a decline rate on home equity products – particularly Home Equity Lines of Credit (HELOC). In fact, the average rate for a HELOC has gone from an average of 9.99% at the beginning of September to 8.69% today.
Meanwhile, traditional mortgage rates have increased. What is behind this and can we expect home equity rate continue to fall?
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What causes home equity loan interest rates to drop? And will they continue to fall?
Here’s what experts have to say about what drives home equity loan rates — and whether they’re likely to drop in the future.
HELOCs are directly linked to the Fed rate
Let’s be clear: it’s largely HELOC rates that have fallen lately. Although home equity loan rates have fallen slightly, it’s only by a few points.
The reason HELOCs are so affected, experts say, is because their rates are directly based on the Fed rate — also called the federal funds rate.
“HELOC rates typically use the prime rate as a starting point, which is typically a few points higher than the Fed rate,” says Rose Krieger, senior home loan specialist at Churchill Mortgage. “So if the Fed rate goes down, we can expect the policy rate to go down as well, which will lower overall HELOC starting rates.”
But it’s not just departure rates that have fallen. While new HELOC borrowers certainly benefit, existing HELOC borrowers also gain thanks to the recent reductions. This is because HELOCs are variable rate products. This means that when their index rate goes down, the rate on current HELOCs goes down as well. This can reduce your interest charges and monthly payments.
“Homeowners with HELOCs saw a 0.50% rate reduction a few weeks ago when the Fed cut rates by 0.50%,” said Bill Westrom, CEO of the line of credit banking platform Truth In Equity.
Other financial products like credit cards are also based on the prime rate, so they have also seen reductions in recent weeks (although much smaller than on HELOCs).
“One of the benefits of the federal government’s recent decision to cut the federal funds rate is that it also led to lower rates on HELOCs, credit cards and a number of other products,” said Darren Tooley, head of loans at the Union. Residential mortgage.
Learn more about the home equity loan rates available to you now.
Mortgage rates are based on other factors
Long-term mortgage rates are not directly linked to the Fed rate. Although Fed decisions influence them to some extent, the correlation is more nuanced and many other factors come into play as well.
“The Federal Reserve does not directly control mortgage rates,” says Westrom. “Mortgage rates are tied to the 10-year Treasury, not the Federal Reserve. The Fed’s rate decisions have a direct effect on money flow on Wall Street, and it is that money flow that affects rates mortgages.”
Investments in mortgage-backed securities also play a role, Tooley says, and these are “traded daily, similar to stocks.”
“The MBS market had been pricing in a Fed rate cut before the official announcement, so mortgage rates fell in September in anticipation of the cut,” says Tooley. “Shortly after the Fed announced a rate cut, the U.S. Bureau of Labor Statistics released its September numbers, which were much stronger than expected, negatively impacting the bond market. MBS and has so far led to a rise in mortgage rates in October.”
Home Equity Loanswhich are longer term fixed rate products, are in the same boat.
“For a closed-end loan, the trend follows what traditional purchase rates do,” Krieger says.
Rates could fall further
The Federal Reserve still has two meetings left for 2024: one in November and one in December. According to CME Group’s FedWatch tool, there is a 91% chance of another rate cut in November and a 77% chance of another rate cut in December.
With that in mind, it’s possible that HELOC rates – and potentially home equity and long-term mortgage rates – will fall as a result.
“The Fed’s rate decision will be based on its assessment of the current state of the economy and its direction – based largely on things like inflation data, job creation and unemployment,” Tooley said. “This is widely expected to be the first of many rate cuts between now and the end of 2025.”
For now, Fannie Mae projects the 30-year average rate will fall to 6% by the end of the year and to 5.6% by the end of 2025. There is no official forecast for home equity rates, although Westrom says he believes a 0.25% to 0.50% decline in HELOC rates is possible over the next three to six months.
“Unfortunately, my crystal ball is as foggy as anyone else’s,” Westrom says. “There is so much conflicting data and so many variables that affect the Fed’s decisions. All we can really do is observe, wait and react to the world around us.”
The essentials
While waiting to release a HELOC or Home Equity Loan could mean lower interest rates, it’s not always the right decision, especially if you need cash now. Home equity products generally have much lower rates than credit cards, so if you’re turning to plastic for all the expenses you need, a HELOC or a home equity loan is often a better choice.
You can also help lower the rate you get on your loan by improving your credit score before you apply. Having a lot of equity in the home can also help.
