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

Swiping Through the Fed's Decisions on Home Equity Loans

The Federal Reserve's impact on the federal funds rate affects variable-rate home equity lines of credit (HELOCs) and home equity loans, but how, exactly? Let's explore this financial conundrum.

On the Fed's June 2025 Stand

At its June 2025 meeting, the Federal Reserve left interest rates unchanged, marking the fourth consecutive hold. Despite President Donald Trump's tariffs driving ongoing inflation concerns, Fed officials didn't discount the possibility of reducing rates later in the year. The central bank's next monetary policy-setting meeting is slated for July 29-30.

Anatomy of the influence

When the Fed tinkers with the federal funds rate - the interest rate banks charge each other for overnight loans - it impacts other benchmarks, too. The prime rate, which sits 3 percentage points higher than the federal funds rate and typically shadows its movements, is one such marker.

Many home equity lenders attach rates on HELOCs and home equity loans to the prime rate. Variable HELOC rates hopscotch with the federal funds rate and the prime rate, making them more or less expensive depending on the moves. Fixed-rate home equity loans, on the other hand, are less sensitive to Federal Reserve decisions.

Pinpointing the Sting

It's a swift adjustment. Current HELOC borrowers can expect their interest rates and payments to adapt within a month or two after a Fed rate change, while existing home equity loan borrowers remain unaffected because their rates are stationary. However, the rates advertised for new home equity loans may exhibit Fed changes relatively quickly.

"For new offers on both products, rates could change right away after the Fed makes a move," says Ted Rossman, senior industry analyst at Bankrate. "The time it takes for a lender to adjust depends on the market and their decision-making process."

If you already have a HELOC but haven't drawn from it, rising rates won't impact your wallet too much. If you owe, you'll face a larger monthly payment to cover within the next couple of billing cycles, no matter if you're in the draw or repayment phase. You may opt to lock in a fixed rate on a portion of your HELOC balance to shield yourself from potential rate increases.

A Journey Through Fed Action

. Feds rate history: 1981-present

. Now, or Never?

Although the Fed hasn't lowered rates since 2024, the 2024 reductions have made home equity borrowing cheaper, with average HELOC rates nearly a full percentage point lower as of June 18, 2025[4]. Currently, HELOC rates average 8.27 percent[3], while home equity loan rates sit at 8.25 percent as of June 18, 2025[3]. Both are forecasted to recede further. However, rates are still significantly higher than they were just a few years back.

"Interest rates, while down, still aren't at historic lows," says Greg McBride, chief financial analyst at Bankrate. "Home equity borrowing is not the cheap source of funds it once was between 2002 and 2022."

When considering a HELOC or home equity loan, always examine the maximum interest rate the product can reach, your responsibilities for interest payments during the draw period, and a plan to repay the debt without indefinitely carrying it[6].

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Insights

HELOCs have variable interest rates that are tied closely to the prime rate, which in turn moves in tandem with the federal funds rate set by the Fed.
When the Fed raises or cuts the federal funds rate, HELOC interest rates typically adjust accordingly.
Variable-rate HELOC rates respond relatively quickly and directly to Fed rate changes.
Home equity loans usually have fixed interest rates set at the time of origination and aren't directly influenced by changes in the federal funds rate.
However, new home equity loans can become cheaper or more expensive based on general interest rate trends shaped by the Fed and bond markets.

References

[1] Bankrate: https://www.bankrate.com/banking/heloc/

[2] Nerdwallet: https://www.nerdwallet.com/blog/loans/mortgages/fed-rate-watch-how-federal-reserve-decisions-affect-mortgages/

[3] Bankrate, June 2025: https://www.bankrate.com/mortgages/average-mortgage-rates/

[4] Bankrate, December 2024: https://www.bankrate.com/mortgages/archives/average-mortgage-rates/

[5] FedRateMonitor: https://www.fedratemonitor.com/

[6] MyFico: https://www.myfico.com/credit-education/helocs- versus-home-equity-loans-which-is-better

The Federal Reserve's decision to change the federal funds rate can impact the prime rate, which in turn affects the interest rates on home equity lines of credit (HELOCs) and home equity loans, as many lenders attach rates to the prime rate.
For investors considering real estate, understanding the Fed's actions and their influence on variable-rate HELOCs can be important, as changes in the federal funds rate can lead to swifter adjustments in HELOC interest rates, affecting monthly payments for those with existing or new HELOCs.

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