How Will the Latest Federal Reserve Interest Rate Hike Impact HELOC Borrowers?

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The Fed just raised interest rates by 0.25%. Read on to see how that might impact your existing HELOC. 

The Federal Reserve is on a mission to bring annual inflation back down to the 2% mark. That level, the central bank feels, is most conducive to economic stability.

But as of March 2023, annual inflation was stuck at 5%, as measured by that month’s Consumer Price Index. So clearly, there’s still work to be done by the Fed.

To that end, the Fed decided to raise its benchmark interest rate by 0.25% on May 3. It’s the third time since the start of 2023 that the central bank implemented an interest rate hike of that nature.

Unfortunately, interest rate hikes have been driving the cost of borrowing up for consumers. And so if you owe money on a home equity line of credit, or HELOC, you may need to brace yourself for higher payments in light of the latest rate hike.

Your HELOC might start to cost you more

The Federal Reserve does not set consumer borrowing rates. Personal loan lenders, for example, decide what rates to charge borrowers based on different factors that include credit scores, as do mortgage lenders. But when the Fed raises its benchmark interest rate, the cost of consumer borrowing tends to rise as a result.

Now, if you happen to owe money on a loan with a fixed interest rate, like a personal loan or home equity loan, then the Fed’s latest rate hike shouldn’t impact your existing debt. That’s because the interest rate on your loan is locked in. Rather, it’s HELOC borrowers who might run into issues with their payments increasing.

See, HELOCs tend to come with variable interest rates, so the rate on your HELOC could climb as you’re paying it off. That could, in turn, make your monthly HELOC payments more expensive. If you’re already struggling to fit those payments into your budget, things might get worse in the coming months, unfortunately.

Be careful when taking out a HELOC

Maybe you don’t currently have a HELOC. But if you’re thinking of taking one out, you may want to proceed with caution.

The nice thing about HELOCs is that they give you flexibility. You can get access to a line of credit and draw from it as needed over the course of multiple years (the specific time frame you have to work with will depend on the terms of your credit line, but it’s not uncommon to get 10 years to tap a HELOC).

The flipside of that, though, is that you’re not locking in fixed monthly payments on your HELOC. So during periods when interest rates rise, HELOCs can become costly and therefore dangerous.

Remember, falling behind on a HELOC may not just mean causing damage to your credit score. It could also mean putting yourself at risk of losing your home. Because it’s gotten so expensive across the board to borrow money, and because of the way HELOC interest tends to work, now’s really not the best time to tap your home equity and take out a line of credit.

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