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What causes home equity loan interest rates to drop? And will they keep falling?
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The Federal Reserve opted for a rate cut last month, and more cuts could be on the horizon as we head toward 2025.
So far, the move has led to lower rates on home equity products — particularly home equity lines of credit (HELOCs). In fact, the average rate on a HELOC has dropped from an average of 9.99% at the start of September to 8.69% today.
In the meantime, rates on traditional mortgage loans have actually risen. What’s behind this, and can we expect home equity rates to keep falling?
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What causes home equity loan interest rates to drop? And will they keep falling?
Here’s what experts have to say about what drives home equity loan rates — and whether they’re likely to fall in the future.
HELOCs are directly tied to the Fed’s rate
To be clear: It’s largely HELOC rates that have fallen lately. While home equity loan rates have dipped slightly, it’s only been by a few points.
The reason HELOCs are so affected, experts say, is that their rates are directly based on the Fed’s rate — also called the federal funds rate.
“HELOC rates typically use the prime rate as a starting point, which is usually a few points higher than the Fed rate,” says Rose Krieger, senior home loan specialist at Churchill Mortgage. “So, if the Fed rate comes down, we can anticipate that the prime rate will come down as well, lowering the overall starting rates for HELOCs.”
It’s not just starting rates that have fallen, though. While new HELOC borrowers are certainly benefitting, existing HELOC borrowers also win out with recent reductions. That’s because HELOCs are variable-rate products. That means when their index rate falls, so does the rate on current HELOCs. This can reduce your interest costs and monthly payments.
“Homeowners with HELOCs just saw a .50% rate reduction a couple of weeks ago when the Fed reduced rates by .50%,” says Bill Westrom, CEO of credit line banking platform Truth In Equity.
Other financial products like credit cards are also based on the prime rate, so those have seen reductions in recent weeks, too (though much smaller ones than on HELOCs).
“One of the benefits of the Feds’ recent decision to cut the federal funds rate is that it’s caused the rates on HELOCs, credit cards, and a number of other products to fall as well,” says Darren Tooley, a loan officer at Union Home Mortgage.
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Mortgage rates are based on other factors
Long-term mortgage rates aren’t directly connected to the Fed’s rate. While the Fed’s moves do influence them to some degree, the correlation is more nuanced, and there are many more factors that play in as well.
“The Federal Reserve does not control mortgage rates directly,” Westrom says. “Mortgage rates are tied to the 10-year Treasury, not the Federal Reserve. Fed rate decisions have a direct affect on money flow on Wall Street, and it’s that money flow that affects mortgage rates.”
Investments into mortgage-backed securities play a role, too, Tooley says, and these are “traded daily, very similarly to stocks.”
“The MBS market had forecasted the Fed cutting rates before the official announcement, so mortgage rates went down in September in anticipation of the cut,” Tooley says. “Not long after the Fed announced cutting rates, the US Bureau of Labor Statistics came out with its September numbers, which were much stronger than anticipated, negatively impacting the MBS market, and so far causing mortgage rates to increase in October.”
Home equity loans, which are longer-term, fixed-rate products, are in this same boat.
“For a fixed equity loan, the trend follows what traditional purchase rates are doing,” Krieger says.
Rates could fall further
The Federal Reserve still has two meetings left for 2024 — one in November and one in December. According to the CME Group’s FedWatch Tool, there’s a 91% chance of another rate cut in November and a 77% chance of another cut in December.
With that in mind, it’s possible HELOC rates — and potentially home equity and long-term mortgage rates as well — will drop as a result.
“The Fed’s rate decision will be based on its evaluation of the current state of the economy and its direction — largely based on things like inflationary data, job creation, and unemployment,” Tooley says. “It is widely forecasted that this was the first of many future rate cuts between now and the end of 2025.”
As of now, Fannie Mae projects the average 30-year rate will fall to 6% by year’s end and 5.6% by the end of 2025. There are no official forecasts for home equity rates, though Westrom says he believes a drop of 0.25 to 0.50% in HELOC rates is possible over the next three to six months.
“Unfortunately, my crystal ball is as foggy as anyone else’s,” Westrom says. “There is so much conflicting data and so many variables that affect the Fed’s decisions. All we can really do is watch, wait, and react to the world around us.”
The bottom line
While waiting to take out a HELOC or home equity loan could mean lower interest rates, that’s not always the right move — especially if you need cash now. Home equity products typically have much lower rates than credit cards, so if you’d turn to plastic for whatever expense you need covered, a HELOC or home equity loan is often a better bet.
You can also help reduce the rate you get on your loan by boosting your credit score before applying. Having plenty of equity in the home can also help.
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No matter how careful you are about your spending, if you’re carrying a credit card balance from month to month, you’re running the risk of your debt spiraling out of control. One of the main issues is that credit card interest charges compound, meaning that you’re charged interest on both your balance and the interest charges over time. But the compound nature of credit card debt is only one issue. Today’s high credit card rates are another factor to consider — and at an average of 23%, you don’t need to spend much to see the balance grow quickly.
Unfortunately, many people are stuck relying on their credit cards right now, despite the compounding nature of the interest and today’s high average rates. That’s because while there have been big improvements in terms of inflation, the lingering effects have resulted in much higher costs for necessities like food, housing and utilities. As a result, many households have had to turn to plastic to help cover their everyday expenses. If you’re one of them, it’s important to get rid of this type of debt as soon as possible.
But what are your options if you’ve racked up a significant amount of credit card debt, like $25,000 worth? One option that may be worth considering is credit card debt forgiveness, also known as debt settlement. This approach involves negotiating with your creditors to reduce the total amount owed, which can result in significant relief. Before you start down this path, though, it’s important to understand how much of a $25,000 debt a forgiveness plan will cover.
Compare your debt relief options now.
How much of a $25,000 credit card debt will a forgiveness plan cover?
Debt forgiveness programs typically result in settling your debt for 30% to 50% less than the original amount. For a $25,000 credit card debt, this could mean reducing your debt to a range of $12,500 to $17,500. While this might sound like a significant reduction, the process isn’t always straightforward, and the actual amount that’s forgiven will depend on your financial situation and your creditors’ willingness to negotiate.
For example, creditors are more likely to agree to a settlement if they see it as the best way to recover part of what they are owed. That’s why borrowers who are facing serious financial hardships are typically in a better position to negotiate more substantial reductions. In these cases, creditors understand that if your situation worsens, you might be unable to pay anything, making them more likely to settle for less now rather than risk a total loss.
If you’re still making your minimum payments on time, though, your creditors may be less likely to agree to a debt settlement. Creditors aren’t required to negotiate, and in most cases, they won’t consider a settlement until you’ve fallen behind on your payments, which can have consequences. Being late on payments can hurt your credit score, lead to additional fees and may even result in legal action or debt collection efforts.
Another key point to consider is that any amount of debt forgiven could be taxed as income by the IRS. If, for example, $10,000 of your $25,000 debt is forgiven, you could be required to report that $10,000 as income on your tax return, which could result in a higher tax bill. While this doesn’t negate the benefit of debt forgiveness, it’s something you’ll need to plan for when considering this option.
So while debt forgiveness programs can offer significant relief, they come with conditions. You’ll need to demonstrate financial hardship, be prepared for potential credit damage and plan for the tax implications of any forgiven debt. It’s still a solution worth considering for those overwhelmed by large balances, but it’s important to fully understand the terms and consequences before committing.
Enroll in a debt forgiveness program today.
What other debt relief options should I consider?
If debt forgiveness isn’t suitable for your situation, several alternatives exist, including:
Debt consolidation loans
With a debt consolidation loan, you:
- Combine multiple credit card balances into one loan with a potentially lower interest rate
- Create a single, more manageable monthly payment
- Establish a clear path to becoming debt-free
- Potentially improve your credit score by reducing credit utilization
Balance transfer credit cards
With a balance transfer, you can:
- Take advantage of 0% APR promotional periods, typically lasting 12-21 months
- Temporarily halt interest charges while focusing on principal reduction
- Make faster progress paying down debt
- Save significantly on interest charges during the promotional period
Debt management plans
With a debt management plan, the goal is to:
- Potentially reduce interest rates through creditor negotiations
- Create a structured repayment plan with professional guidance
- Have late fees and penalties reduced or waived
The bottom line
Carrying $25,000 in credit card debt can be overwhelming, but several debt relief options can help ease the burden. Debt forgiveness programs may allow you to settle for less than the full amount, potentially reducing your balance by up to 50%. If debt forgiveness isn’t right for you, options like debt consolidation, balance transfers and debt management plans could offer alternative paths to becoming debt-free. So, take the time to explore each approach and choose the one that best fits your financial needs and goals.
