How Will the Latest Federal Reserve Interest Rate Hike Impact Home Equity Loan Borrowers?

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The Fed just raised interest rates by 0.25%. Read on to see how that might impact an existing or future home equity loan. 

The Federal Reserve has been eager to bring inflation down to a more moderate level. In fact, the central bank likes to target 2% inflation because it feels that at that level, the U.S. economy can thrive and grow.

But as of March, annual inflation was measured at 5%, as per that month’s Consumer Price Index. So clearly, the Fed can’t exactly back down if it wants inflation at 2%.

It wasn’t very surprising, then, to learn that the Fed opted to raise interest rates by 0.25% on May 3, marking the third rate hike of that nature since the beginning of 2023. Unfortunately, rate hikes on the part of the Fed have the potential to impact consumers negatively. So you may be wondering how the latest hike will affect your home equity loan.

The good news is that your existing home equity loan shouldn’t change in the wake of the latest rate hike. But you should also know that it’s a pretty bad time to apply for a new one.

Your rate is locked in

The Federal Reserve does not set consumer borrowing rates. Rather, it oversees the federal funds rate, which is what banks charge each other for short-term borrowing purposes.

But when the Fed raises interest rates, it tends to drive the cost of consumer borrowing up. So in the coming months, you might get stuck with a higher interest rate on a personal loan, auto loan, or home equity loan if you sign up for one.

That’s why now’s not a great time to apply for a home equity loan. Chances are, you’ll get stuck with a higher interest rate than you want, even if you happen to have excellent credit and plenty of equity in your home to tap.

That said, if you already have a home equity loan you’re making payments on, the latest Fed rate hike shouldn’t be cause for concern. The nice thing about home equity loans is that they come with fixed interest rates. So the payments you’re making now should not increase in light of the Fed’s latest hike.

HELOCs, or home equity lines of credit, are a different story. With a HELOC, you’re generally looking at a variable interest rate, so current HELOC borrowers could see their payments increase in the coming months. But if you have a home equity loan, you really don’t have to worry about that.

Hold off on a home equity loan

If you have a pressing need to borrow money, such as to fix a major issue with your home, then a near-term home equity loan application might be in your future, and that may be unavoidable. But if you’re looking to borrow money for a non-urgent matter, well, don’t.

Right now, the cost of borrowing is high across the board, so you’re generally looking at paying more interest no matter what type of loan you sign. If you’re borrowing to do something like renovate your home, and it can wait, then you may want to consider postponing your project until next year, or until borrowing costs start to drop. Otherwise, you might end up spending a lot of money on interest.

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