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The sun is starting to shine again on the interest rate environment after the Federal Reserve raised the federal funds rate 11 times between March 2022 and July 2023 to curb inflation, causing interest rates on lending products to skyrocket. The agency then froze interest rates for over a year to monitor inflation, aiming to achieve a “soft landing” without causing a recession.
To the delight of the borrowers, the The Fed has made a huge interest rate cut of 50 basis points at the September meeting, and the forecast of year-end interest rates has led many economists to predict further cuts this year and in 2025. Although the Fed does not set interest rates, they tend to loosely follow the Fed’s interest rate decisions. As of October 21st interest on mortgage loans average 8.36% and home equity line of credit (HELOC) rates average 8.69% – and rates may drop further this fall.
Most HELOCs are included variable ratesmeaning your interest rate could drop if interest rates continue to fall. But some lenders offer fixed-rate HELOCs, which can be attractive if you’re looking for the predictability that comes with a monthly payment that doesn’t change. But in today’s rate environment, is it worth getting a fixed-rate HELOC?
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Why a fixed-rate HELOC is worth it now, experts say
For many homeowners and real estate investors, a variable rate HELOC is a valuable option right now because it allows them to take advantage of the potential for falling interest rates. However, a fixed-rate HELOC is still beneficial for some borrowers, especially those who are forecasting over a longer time horizon and looking for a consistent monthly payment.
Neil Christiansen, branch manager and certified mortgage advisor at Churchill Mortgage, reminds borrowers that home interest rates can fluctuate and rise again as inflation increases. And given that the economic climate – inclusive the inflationary atmosphere – can change quickly, and a fixed-rate HELOC can act as a protective measure if this happens.
“Variable HELOCs are tied to the base rate,” Christiansen says. “Primary rates will adjust based on how the Fed raises or lowers the fed funds rate. A variable rate HELOC could benefit from further rate cuts that the Fed decides to implement. However, this is not a guarantee and if inflation is more of a rolling variable, interest rates could rise in the future and this is where a fixed rate HELOC will benefit a borrower who is less risk averse.”
If you think interest rates will rise while you do that repay your HELOCyou can rest easy knowing that your rate will not change and you will continue to receive predictable monthly payments.
“A fixed-rate HELOC guarantees that rates will not change over the life of the loan,” says Jeremy Schachter, branch manager at Fairway Independent Mortgage Corporation. “There is no guarantee what the Federal Reserve will do with interest rates in the future.”
Discover today’s best HELOC rates here.
Why a fixed-rate HELOC isn’t worth it now, experts say
While a fixed rate is a solid option for many borrowers, it may not be ideal for people who want to take advantage of falling interest rates in the future.
‘I don’t think it would make sense to lock in an interest rate if interest rates are on a downward trend. When rates were trending upward, it made sense to try to lock in a rate with a HELOC, but now that the Fed has put the rate in place The rate cut cycle puts you at a disadvantage in that you cannot take advantage of future rate cuts in the next 12 to 24 months,” said Sarah Alvarez, Vice President of Mortgage Banking at William Raveis Mortgage. “The HELOC rate moves with the Fed rate, so every time it is lowered you will see an improvement in your rate with a floating HELOC.”
Christiansen notes that a variable rate HELOC could be better suited for borrowers who are more comfortable with risk and understand how exchange rate fluctuations may change their monthly payments.
“Over the next one to two years, we could see a rate-cutting environment from the Fed, and those who lock in rates today will not experience the benefit that a floating rate HELOC will provide,” Alvarez says.
Ask lenders about your HELOC options
If you’re unsure whether a fixed or variable rate HELOC is right for your unique financial situation, ask the lenders you’re considering about all of their HELOC options. For example, some lenders offer “hybrid” HELOCs that let you convert some or all of your variable-rate HELOC to a fixed-rate line during the draw period. Other lenders offer the option to lock in a fixed rate for each of your withdrawals, but may limit the number of rate locks. Lenders’ rates and options vary widely, so it’s wise to compare multiple loan options to find the best solution for your needs.
The bottom line
When choosing between a fixed and variable rate HELOC in the current economic climate, homeowners should carefully consider their financial goals, risk tolerance and expectations for future interest rate movements. While variable-rate HELOCs offer the potential to take advantage of falling interest rates, fixed-rate options offer stability and predictability in monthly payments. By carefully weighing the pros and cons of each option and staying abreast of economic trends, borrowers can make an informed decision that meets their long-term financial goals.
