Is It a Bad Time to Get a HELOC?
Is it a bad time to get a HELOC?
No. In fact, it could be a very good time. While HELOC rates are higher than they used to be, they are at historically normal levels. More important, they could be on their way down soon.
Here’s why it might be one of the smartest times in history to get a home equity line or loan.
HELOC Rates Could Be On Their Way Down
The years 2020 through early 2022 were arguably worse times to get a HELOC.
Rates were about to skyrocket, but borrowers didn't realize it. Many people were caught off-guard.
HELOC rates are tied to the prime rate. The prime rate skyrocketed from 3.25% in early 2022 to 8.5% in October 2023, where it stands today.
Someone with a $100,000 HELOC at prime saw their payment jump from $270 to $750 per month.
New HELOC borrowers will likely see their payments drop in 2024 and beyond.
Federal Reserve Plans Rate Cuts, Helping HELOC Borrowers
The prime rate determines interest rates for most HELOCs. Prime typically equals the federal funds rate plus 3%. The Federal Reserve sets the federal funds rate based on economic conditions.
When the Fed cuts its rate, HELOC rates drop.
CME Group predicts federal funds rate changes with its CME FedWatch Tool. It gives a 54% chance that the Fed will cut by 0.25% in June 2024 and a 92% chance of lower rates by September.
A homeowner who opens a HELOC now could see their rate drop by 0.75% by the start of 2025, according to the tool.
If CME Group is right – and it usually is – here’s what it could mean for those with a HELOC at the prime rate.
Current (8.5% Prime Rate) | June 2024 Payment* | September 2024 Payment* | December 2024 Payment* | |
$50,000 HELOC | $354 | $344 | $333 | $323 |
$100,000 HELOC | $708 | $688 | $667 | $646 |
$200,000 HELOC | $1,417 | $1,375 | $1,333 | $1,292 |
*Predictions assume a 0.25% fed funds rate cut based on the CME FedWatch Tool predictions as of 3/14/24. Interest-only payments. Rate cuts may not materialize. For example purposes only.
Even better news: The Fed could keep cutting rates into 2025, providing HELOC holders with more affordable payments and borrowing power.
Home Values Continue to Rise
One risk to using a HELOC is that it could eat up your remaining home equity. This limits your ability to sell if you need to.
HELOCs become a real burden if home values drop. In fact, lenders can freeze your HELOC when values fall, limiting future borrowing.
Fortunately, home prices show no signs of weakness.
Decades-high mortgage rates haven’t put a dent in prices. The Federal Housing Finance Agency says home prices hit a record high in the fourth quarter of 2023 despite a historic run-up in 2021 and 2022.
That’s not good news for homebuyers, but should make homeowners quite happy -- in part because they can better access HELOCs.
Homeowners Sitting On Nearly $300k In Home Equity
As of February 2024, the average homeowner with a mortgage was sitting on $299,000 in home equity according to ICE Mortgage Technology. They could get a $193,000 HELOC and still have 20% equity in the home.
Yet, some HELOC lenders let you tap 90%, 95%, or even 100% of your home’s equity.
Imagine having $300,000 available to you for renovations, debt consolidation, a new business, or just as an emergency cushion.
HELOCs are much easier to qualify for than traditional refinances. Some require just basic income information. You may not even need an appraisal.
Plus, many lenders offer low or no closing costs, making the barrier to entry even lower.
HELOCs can be a great way to tap equity since you don’t lose your first mortgage rate. There’s absolutely no affect on your primary mortgage. Homeowners with a rate in the 2s, 3s, and 4s don’t have to get a full cash-out refinance at today’s higher rates to access cash.
Related: HELOC vs Cash-Out Refinance
Best Uses for a HELOC
A HELOC can be used to
Improve or expand your home rather than sell
Make strategic financial investments
Draw and pay back funds as needed for up to 10 years
Get cash in retirement as a reverse mortgage alternative
The possibilities are nearly endless since lenders put few if any stipulations on what you can do with the money.
See if you qualify for a HELOC.
Is It Time to Get a HELOC?
The environment for HELOCs is getting more favorable by the day.
See how much equity you can tap, and at what rate, by speaking with a licensed professional.
Tim Lucas is the editor and Lead Analyst for MortgageResearch.com. Tim spent 11 years in the mortgage industry and now leverages that real-world knowledge to give consumers reliable, actionable advice. He has been featured in national publications such as Time, U.S. News, MSN, The Mortgage Reports, and more.
