Home Equity Rates, the Fed, and What’s Next for Home Equity Borrowing
Introduction to Home Equity Rates
The Federal Reserve recently lowered its benchmark overnight lending rate, marking the beginning of a potential easing cycle after months of holding rates steady. This decision has significant implications for homeowners, as the Fed’s moves can impact home equity loan and HELOC rates, making it more expensive or affordable to tap into the value of their homes.
Fed Tightening to Improve Home Equity Rates
For homeowners with a HELOC, the Fed’s moves are crucial, as HELOCs have variable rates tied directly to the prime rate, which typically moves in lockstep with the Fed’s benchmark rate. In contrast, fixed-rate home equity loan rates are less sensitive to Fed moves, although new borrowers may see their rates gradually shift as well. The recent cut is already showing up in the numbers, with both HELOCs and home equity loans recording significant drops in the week of September 24, falling to 7.88% and 8.19%, respectively, according to Bankrate’s national survey of lenders.
By Linda Bell, Bankrate.com
The Fed’s decision to cut rates is expected to continue, with the Fed signaling more rate reductions to come. "Incorporating the full point of cuts the Fed made last year, plus the recent quarter-point cut and the half-point of additional [quarter point] cuts forecast by the end of the year [at the October and December meetings], that’s 175 basis points in total cuts from September 2024 through December 2025, most likely," says Ted Rossman, senior industry analyst at Bankrate. This means that by year’s end, average HELOC rates could land around 7.3%, while fixed-rate home equity loans may ease more slowly and settle around 7.9%.
Home Equity Rate Relief Impact
Although rates may trend lower this year, it will take some time for a drop in home equity rates to reach borrowers’ wallets. "While there is certainly cause to rejoice with the Fed cutting rates, it will take many rate cuts of 0.25% for consumers to start really noticing and feeling the improvement in their monthly payments," says Sarah DeFlorio, vice president of mortgage banking at William Raveis Mortgage, a real estate company based in Connecticut. In other words, it’s a series of interest rate cuts, and not just a single one, that will make the most difference.
Teaser Rate Offers Will Be Subdued
In falling interest rate environments, lenders often roll out promotional HELOC rate offers to capitalize on rising consumer demand. However, the timing of the Fed cuts at the end of the year could put a damper on those deals. "Marketing spend is typically front-loaded for the spring lending season, and right at that time, we saw probably the biggest number on record of the usage of promotional rates," says Ken Flaherty, senior manager, retail lending at Curinos, a data insights firm based in New York.
Why Equity Tapping Is Likely to Rise
Even without aggressive promotions, there are two primary reasons more homeowners could tap into their housing stake. Although equity growth has moderated, homeowner equity totaled $17.5 trillion in the second quarter of 2025, or about $307,000 per homeowner, according to Cotality data. Additionally, millions of homeowners are "locked in" to 2- to 3-percent mortgages and are reluctant to sell. Tapping into their equity for renovations or debt consolidation is a way to put that wealth to work without giving up a cheap first mortgage.
Economic Wild Cards
Of course, nothing is guaranteed. The Fed’s path and that of home equity rates depend on how the economy evolves. Warning signs are indeed flashing, with inflation still a concern, along with a softening job market. At a post-meeting news conference, Fed chair Jerome Powell said, "In the near term, risks to inflation are tilted to the upside and risks to employment to the downside, a challenging situation. When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate."
How Homeowners Can Prepare
For now, the trend points to gradually lower home equity borrowing costs, especially for HELOCs. Keeping an eye on the Fed’s moves can offer clues to where home equity rates may be headed. For borrowers, the best strategy now is to stay alert and adaptable. Be sure to shop around, as not all lenders price their products the same way. And whether you need to tap your housing stake for renovations, to consolidate debt, or for a cash cushion, the best course of action is to get professional advice.
Conclusion
In conclusion, the recent rate cut by the Federal Reserve is expected to have a positive impact on home equity rates, making it more affordable for homeowners to tap into their housing stake. Although rates may trend lower this year, it will take some time for a drop in home equity rates to reach borrowers’ wallets. Homeowners can prepare by staying alert and adaptable, shopping around for the best rates, and getting professional advice.
FAQs
Q: What is the current average HELOC rate?
A: The current average HELOC rate is around 7.88%, according to Bankrate’s national survey of lenders.
Q: How will the Fed’s rate cuts impact home equity loan rates?
A: The Fed’s rate cuts are expected to have a positive impact on home equity loan rates, making it more affordable for homeowners to tap into their housing stake.
Q: What is the best strategy for borrowers in the current interest rate environment?
A: The best strategy for borrowers is to stay alert and adaptable, shop around for the best rates, and get professional advice.
Q: How much can homeowners expect to save on their monthly payments if HELOC rates fall to the low 6% range?
A: If HELOC rates fall to the low 6% range, homeowners can expect to save around $50 on their monthly payments, which is about 17% less than today’s levels.
Q: What are the economic wild cards that could impact home equity rates?
A: The economic wild cards that could impact home equity rates include inflation, a softening job market, and the Fed’s decision to slow or pause its rate cuts.
