Impact of Federal Reserve on Home Equity Lines of Credit (HELOCs) and Home Equity Loans

Impact of Federal Reserve on Home Equity Lines of Credit (HELOCs) and Home Equity Loans

The Federal Reserve's decision to adjust the federal funds rate has a direct impact on home equity lines of credit (HELOC) rates, according to Greg McBride, CFA, chief financial analyst for Bankrate.

HELOC interest rates are generally variable and tied to the Wall Street Journal prime rate, which closely tracks changes in the federal funds rate set by the Fed. Therefore, when the Fed increases the federal funds rate, HELOC rates typically rise, and vice versa.

In contrast, home equity loans often have fixed interest rates and are less immediately affected by Fed decisions. Their pricing is more tied to longer-term fixed-rate lending rates and lender competition.

With the Fed holding the federal funds rate steady in recent meetings, rates on both HELOCs and home equity loans have remained relatively stable. As of July 2025, average HELOC rates were around 8.26%, while home equity loans averaged 8.25%.

Looking ahead, when the Fed cuts rates, variable-rate HELOCs are expected to lower their rates "stair-step" over subsequent billing cycles, offering savings to borrowers. Fixed-rate home equity loan rates may fall more gradually, depending on market conditions and lender behavior.

McBride advises homeowners to have a game plan for paying back any home equity borrowing, especially given the current high rates. He also mentions that homeowners in certain regions, such as Florida and Texas, should keep a careful eye on home values, as any slide in prices could erode both equity and borrowing power.

While the rates advertised for new home equity loans will reflect any Fed change fairly quickly, McBride warns against borrowing against home equity for frivolous or discretionary purposes. Instead, he encourages homeowners to use home equity loans for home improvements, debt consolidation, or other strategic financial moves.

The next monetary policy-setting meeting of the Federal Reserve takes place on September 16-17. The article does not provide information about the current state of the Federal Reserve's rate pause or its impact on personal loans, mortgage rates, or homebuyers and sellers in this paragraph.

The average HELOC rate closed out 2024 almost a full percentage point lower compared to previous years, according to Bankrate's national survey of lenders. This drop is significant, as HELOCs often have variable interest rates, so their cost of borrowing can rise or fall with the prime rate and fed funds rate. The prime rate usually runs 3 percentage points higher than the fed funds rate.

In summary, changes in the Federal Reserve's federal funds rate translate most quickly and directly into HELOC interest rate changes due to their variable nature, while home equity loan rates adjust more slowly and less directly. Borrowers with HELOCs see rate changes sooner because these loans are indexed to prime rates driven by the Fed's policy moves. Home equity loans, often fixed-rate, are more influenced by overall interest rate trends but move less immediately.

1. In contrast to the direct impact on HELOC rates, home equity loans with fixed interest rates may not be as immediately affected by Fed's decisions due to their pricing being more tied to longer-term fixed-rate lending rates and lender competition.
2. McBride advises homeowners to be strategic when using home equity loans, suggesting they should be used for home improvements, debt consolidation, or other financial moves rather than for frivolous or discretionary purposes.
3. When the Fed cuts rates, homeowners with variable-rate HELOCs can expect to see lower rates "stair-step" over subsequent billing cycles, potentially leading to savings for borrowers.
4. The average HELOC rate dropped significantly in 2024, almost a full percentage point lower compared to previous years, due to decreasing prime rates driven by the Fed's policy moves.
5. The rates of casino-and-gambling activities, sports, technology, education-and-self-development, personal-finance, business, lifestyle, and other areas were not discussed in the context of how the Fed's decisions might impact them.

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