If you were holding off on a home equity line because the Fed was about to cut rates, that plan just got canceled. The Fed held in June, the dot plot flipped to a hike, and the market is now pricing in roughly an 81% chance rates end the year higher than they are today, per CME FedWatch. A HELOC follows the Fed within a month. Yours just got more expensive to bet on.
If you’ve got a project that has to happen, the cleaner trade is the fixed home equity loan. You pay a touch more today and you stop guessing.
What just happened
On June 17, the FOMC held the federal funds rate at 3.50% to 3.75% in a unanimous 12 to 0 vote, the fourth straight hold. That was the easy part. The Summary of Economic Projections turned hawkish: nine of 18 officials now see at least one rate hike this year, the median dot moved to 3.8%, and the statement dropped its easing-leaning language.
This was Kevin Warsh’s first meeting as Fed Chair. Translation: the rate cuts variable-rate borrowers were counting on are now the minority view inside the Fed itself.
The prime rate, set by banks at 3 percentage points above the funds rate, is 6.75%. A HELOC is priced as prime plus a margin (usually 0.5% to 1.5%). When the Fed moves, prime moves, and your HELOC rate moves inside a month.
What this means for your math
Yahoo Finance, citing Bankrate’s late-June survey, has the national average HELOC at 7.25% and the fixed home equity loan at 7.86%. That’s the trade today: variable saves you 0.61 percentage points if rates stay still, costs you if they go up.
Run the math on a $50,000 line. At 7.25%, you carry $3,625 a year in interest on the full balance. A quarter-point Fed hike (FedWatch says 31% odds in July) takes that to $3,750. A second hike pushes you to 7.75% and $3,875. Modest? Sure. But you didn’t sign up for it.
The fixed home equity loan at 7.86% is 0.61 percentage points above today’s HELOC rate. On a $50,000 balance, that’s roughly $305 a year more in interest at the start. If the Fed hikes twice, you’ve broken even on the certainty. Three and you are ahead. The rate doesn’t move for the life of the loan.
This isn’t a “variable is dumb” call. Variable is dumb when the Fed is tightening. The Fed itself just said it might be.
What to do this week
If you don’t need the money yet, don’t take the line yet. HELOCs can sit open and unused, but the bank may charge an annual fee and an inactivity fee. Don’t pay to hold borrowing capacity you’re not sure you’ll use.
If you do need it, do this: get one HELOC quote and one fixed home equity loan quote from the same lender. Compare the numbers cold. Then get one more quote from a credit union, which often runs 0.25 to 0.5 percentage points cheaper on home equity. Use our mortgage calculator to model both against a fixed rate scenario where the Fed hikes once and twice.
If your current first mortgage is at 7% or higher, look at a cash-out refinance instead. You replace the whole loan, pull the cash you need, and skip the second-loan structure. Our mortgages hub and the best mortgage lender rankings are where to start.
If your first mortgage is at 5% or lower, leave it alone. The cash-out math doesn’t work because you’d be giving up a great rate to pull equity. Use the fixed home equity loan instead.
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