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What causes home equity loan interest rates to drop? And will they keep falling?
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.
Learn more about the home equity loan rates available to you now.
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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Skyscraper-sized asteroid and 4 others speed past Earth on the same day
Four large asteroids will make their closest approaches to Earth on Thursday, each passing by the planet within a 24-hour time frame.
Two had already zipped past early in the morning, according to NASA’s Jet Propulsion Laboratory. But the remaining celestial objects on track to follow suit were set to make their appearances — albeit not literally, at least from the viewpoints of skywatchers on the ground — later on in the day. Although Thursday’s routes do mark the closest recorded Earth approaches to date for these asteroids, their paths are still quite far away, too distant for any human to spot one of them zooming through space overhead.
NASA scientists flag locations along these objects paths as close approaches when they are slated to arrive at points within 4.6 million miles from the Earth’s surface, which equates to roughly 19.5 times the distance between the moon and the planet, reads a description on the agency’s asteroid watch dashboard. The average distance from the surface of the planet to its satellite is 239,000 miles although the exact length varies at different points in the moon’s orbit.
When an asteroid is larger than about 150 meters, or about 490 feet, across and skims past Earth within this area deemed close range, scientists consider it a “potentially hazardous object.” That’s about the size of a building, and one of the asteroids passing Earth Thursday exceeds that size threshold. The asteroid, named 2002 NV16 after the year it was discovered, measures about 177 meters or 580 feet across — around the same height as a 50-story skyscraper.
The skyscraper-sized rock will travel by the planet from a point 2.8 million miles away, NASA said. A diagram shows its orbit around Earth, the sun and several other planets nearer the sun in the Solar System.
NASA tracks close approaches and calculates the odds of those space rocks — including asteroids, meteors and meteorites — impacting Earth.
“The majority of near-Earth objects have orbits that don’t bring them very close to Earth, and therefore pose no risk of impact, but a small fraction of them – called potentially hazardous asteroids – require more attention,” according to the website of the Jet Propulsion Laboratory, which manages the center dedicated to studying near-Earth objects for NASA.
All three of the other large asteroids that have passed or will pass Earth on Thursday are considerably smaller than 2002 NV16. Their sizes range from 23 to 52 meters, or 76 to 176 feet, which NASA classifies as generally similar to the size of an airplane. The most miniature among them makes its closest approach to Earth relative to the rest, at about 1.5 million miles from the surface.
A fifth asteroid will also move past Earth on Thursday, but it’s much smaller. At just 16 feet across, that one is about the size of a typical SUV. Its closest approach will happen 184,000 miles from the planet.
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