The Federal Reserve Has Paused Rate Hikes. Here’s What That Means for Home Equity Loan Borrowers

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A pause in rate hikes could be good news for people who are looking to borrow against their homes. Read on to see why. 

Inflation has been a problem for consumers for upward of two years now. And during that time, many people have been forced to rack up costly debt on credit cards just to stay afloat and keep up with basic expenses.

The Federal Reserve has been doing its best to slow the pace of inflation. In fact, the Fed’s ideal inflation target is 2%. And the central bank raised interest rates 10 times between March 2022 and mid-2023, in an effort to bring inflation levels down.

But at its June meeting, the Fed decided to take an “enough is enough” approach to interest rate hikes and not implement another one. That’s something that could work to your benefit if you’re looking to take out a home equity loan soon.

Paused rate hikes are a good thing for borrowers

Whether you’re looking at a personal loan, an auto loan, or another type of loan, a pause in rate hikes is good. That means borrowing levels are likely to hold steady at current market conditions, as opposed to rising again.

To be clear, the Federal Reserve does not set interest rates for home equity loans or any other specific consumer product. Rather, it oversees the federal funds rate, which is the rate banks charge one another for short-term borrowing. But when it costs banks more to borrow money, they tend to pass that cost onto borrowers looking for loans.

However, the Fed has opted not to raise rates for the time being, so that’s a good thing if you’re looking for a home equity loan. However, you may want to apply soon.

The Fed is set to meet again in late July. And while there’s a chance it will uphold its pause on rate hikes during that gathering, we could also be in for an unpleasant surprise. So you may want to put a home equity loan in place before the Fed gets a chance to raise rates again.

Is a home equity loan right for you?

One big misconception about home equity loans is that they must be used to repair or improve a home. You can actually take out a home equity loan and use its proceeds for something that has nothing to do with your home, similar to how a personal loan allows you to borrow money for any purpose.

But while personal loans are unsecured — meaning, they’re not tied to a specific asset you own — home equity loans are secured by the home you’re borrowing against. This means that if you fall behind on your home equity loan payments, you could eventually risk losing your home.

If that’s not a risk you want to take, then you may want to explore other borrowing options. You may find that a personal loan is a better solution for you. And if your credit score is great, you may be able to qualify for a relatively affordable rate on a personal loan, even with borrowing being more expensive these days across the board.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has positions in Target. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.

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