If you have a home equity line of credit (HELOC), down payment assistance may be on the way.
The Fed is expected to “rotate” today, meaning it will move from tightening monetary policy to looser policy.
In other words, they will start reducing prices instead of raising them!
While this may not have a direct impact on long-term mortgage rates, it does directly affect mortgages tied to the primary rate, including HELOCs.
This means that your HELOC rate will decrease with any Fed rate cuts. So if they cut 25 basis points today, your HELOC rate would be adjusted down by 0.25%.
While one cut may not provide much relief, there are expectations that this is the first of many, potentially 200+ bps cuts penciled in over the next 12 months.
So if you’re given the option to “lock in your HELOC rate,” it’s probably best to pass it up.
How HELOC Rates Are Determined
As a quick refresher, HELOCs are variable rate loans, meaning they can adjust each month based on the principal amount.
To come up with your HELOC rate, you combine the HELOC margin, which is fixed, and the principal amount available, which moves in step with the amount of the loan.
Whenever the Fed decides to raise or lower its fed funds rate (FFF), the prime rate will also rise or fall by the same amount.
Since early 2022, the Fed has raised the FFF 11 times, from near zero to 5.25% to 5.50%.
Today, they are expected to lower the FFF by 25 or 50 bps. This means that the banks will reduce the principal amount by the same amount soon after.
A quick note: The Fed does not control long-term mortgage rates, so their action today will have no direct effect on the 30-year default. If they decide a fixed 30 years it can really wake up today!
Anyway, let’s assume you have a margin of 2% and the principal is currently 8.50%. That’s a HELOC rate of 10.50%. Wow!
But if the Fed cuts 25 bps or 50 bps today, that rate will fall to 10.25% or 10%. Okay, we’re going somewhere.
It is still not the lowest level, although it is ultimately not rising and is actually falling.
Now add another 200 bps of cuts and the rate drops to 8%. Well, that could result in some lucrative savings and a lower monthly payment!
What’s Locking in Your HELOC Anyway?
That brings us to “locking in your HELOC.” As noted, HELOCs are variable rate loans.
But sometimes banks will give you the option to lock in the interest rate for the remaining period of the loan. This happened to a friend of mine, who asked today if he should lock his rate.
This only happens if you have opened a HELOC for a period of time and are making drawings on it. Not before, otherwise that would be a fixed rate home loan.
So Bank X might say hey, we know rates have been going up and there’s a lot of uncertainty out there.
If you don’t want to deal with any other changes, you can lock the level you currently have.
For those who ignore the Fed, this may sound like a noble idea. After all, most home owners are risk averse, and that’s why they don’t tend to go with variable rate loans either.
And many borrowers may not have known their HELOC was variable to begin with.
They may jump on the bandwagon and stop worrying. But this would be a really bad time to do that.
You watched helplessly as your HELOC went up again over the past few years. And now you will lock it, when the prices are finally reversed?
Maybe it’s not a good idea. This will benefit the bank, which will do very little if you do nothing and let the rate fall as prime drifts lower and lower over the next 12 months.
If you want to know where the main rate is expected to go, keep an eye on the feed rate forecasts. A good place to do that is the CME website.
They currently forecast the prime rate to be 2.25% lower by September 17, 2025, as seen in the table above.
In other words, if you have a HELOC set at 10% today, it could be 7.75% in 12 months. Don’t lock in the 10% rate and miss out on those savings!
Before creating this site, I worked as an account manager for a real estate broker in Los Angeles. My experiences in the early 2000s inspired me to start writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the mortgage process. Follow me on Twitter for the latest.
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