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Borrowers with home equity lines of credit likely aren’t cheering now that the Federal Reserve has announced its first rate hike.
Their interest rates — and monthly payments — will increase very soon.
Wait, what?
HELOCs come with a variable interest rate that is tied to the prime rate. When the prime rate changes, so will interest rates on lines of credit.
The prime rate, which is the interest rate financial institutions charge to preferred borrowers, is based on the federal funds rate. For instance, since the Fed has bumped the federal funds rate by a quarter of a percent, the prime rate went up that much as well.
And the HELOC rate increase won’t be just a “one and done” type of situation, warns Pava Leyrer, chief operating officer at Northern Mortgage Services in Grandville, Michigan. After the Fed announces its next rate hike, HELOC rates will change again.
“People have been very, very foiled and a lot of them didn’t bother changing their HELOCs or fixing them because (the rate) just had never really changed much,” she says. “I think that’s going to be, I hate to say, a rude awakening for people who aren’t paying attention.”
Payment changes imminent for HELOC
It could take HELOC payments 30 to 45 days to increase after an interest rate bump, says John Stearns, senior mortgage banker at American Fidelity Mortgage Services in Milwaukee.
Stearns says one of the common payment options on a HELOC is interest-only. A quarter-percent change in your interest rate shouldn’t be devastating, no matter which payment option you’ve chosen.
“Even if you’re paying principal and interest, a quarter-percent change shouldn’t change your payment a whole lot,” but that depends on the size of your balance, he adds.
If you can’t handle the uncertainty of a variable-rate HELOC, consider locking in a fixed rate for the unused balance of your credit line, Stearns says.
You could also refinance your first mortgage and HELOC into a new loan, Leyrer adds.
Compare rates on home equity lines of credit.
More homeowners regain equity
More than 250,000 properties recovered equity during the third quarter of this year, according to CoreLogic data released Tuesday. At the end of Q3, 46.3 million — or 92% of all mortgaged residential properties — had equity.
About 4 million homes had negative equity, or were underwater, in Q3 2015. This is down 20.7% from the same quarter in 2014.
As home values rise, more owners now meet the requirements to borrow from their home equity. Learn what it takes to borrow from it.
