High inflation and elevated interest rates have been challenging for borrowers in recent years. However, home equity loans remain a viable option for those looking to tap into their home's value. These loans, backed by your home, often come with lower interest rates than credit cards and other loans. Fortunately, the lending environment is shifting for the better. Inflation is decreasing, and in September, the Federal Reserve cut interest rates by 0.50%. With another Fed meeting on November 6 and 7, and a subsequent one in December, economists predict further rate reductions, potentially making borrowing more affordable.
While these developments are promising, certainty remains elusive. In October, interest rates across various loans, including home equity, increased slightly. As of November 1, 2024, home equity loan and HELOC rates average 8.35% and 8.68%, respectively. Could November events push these rates lower, and if so, by how much? Considering the Fed's actions is crucial. If the Fed reduces the federal funds rate, home equity loan and HELOC rates might decrease. The CME Group's FedWatch Tool indicates a 98% probability of a rate cut in November. If this happens, existing HELOC rates, which are variable, might adjust downwards monthly. In contrast, home equity loan rates, generally fixed, may not respond immediately to Fed rate cuts.
Mason Whitehead, a branch manager at Churchill Mortgage, suggests that a quarter-point Fed rate drop may likewise reduce HELOC rates by a quarter point. He foresees no 50-basis-point cut but acknowledges talk of no cut at all. Jeremy Schachter, from Fairway Independent Mortgage Corporation, suggests December might see a rate cut, depending on forthcoming economic reports. For those considering tapping into home equity, November might offer marginally lower rates. Yet, experts project rates could remain unchanged or fall slightly in the short term. Schachter expects stability in rates post the 0.50% drop in September, citing strong job market data as a potential rate anchor.
The direction of home equity rates might hinge on the U.S. Bureau of Labor Statistics' upcoming jobs report. A strong economy might dissuade the Fed from cutting November rates. Whitehead notes increasing interest in HELOCs, predicting stable or slightly reduced rates. HELOC rates typically align with prime rates, influenced by federal funds rate changes. Any Fed rate cut could cause slight HELOC rate reductions, modest as they may be.
In conclusion, while a potential 0.25% rate drop in November can offer savings, it isn’t assured, and the financial benefits may be limited depending on borrowing amounts. Without a definite rate forecast, focus on manageable payments aligned with your financial objectives. "A home equity loan should align with long-term financial goals," advises Alex Beene, a financial literacy instructor. "If used judiciously to enhance personal or asset value, it can be smart. Without a clear plan, it presents unnecessary risk."
