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CBS News
22-04-2025
- Business
- CBS News
How do changing HELOC rates impact current borrowers?
Interest rates on home equity lines of credit ( HELOCs ) have been in a steady decline since the fall of last year. In fact, rates are now averaging around 8% — down significantly from their almost 10% peak seen in September of last year. But home equity borrowing rates won't always be falling. While these are positive trends for existing HELOC holders and new borrowers right now, the tides could turn, and HELOCs' changing rates could pose a problem for consumers. What exactly does the volatility of HELOC rates mean for borrowers? And how should that inform your decision to take out a HELOC — or avoid one? Start comparing today's top home equity borrowing rates . Here's what experts say about how changing HELOC rates can impact current borrowers. With HELOCs, this is the best-case scenario — and it's what consumers are seeing right now: Declining rates and, subsequently, declining monthly payments. It's not always a one-for-one decline. HELOC rates are typically based on the prime rate, plus a margin, which can vary depending on your lender and financial profile. They also don't all adjust at the same pace. "There are a lot of different HELOC programs. Some float monthly, meaning your rate can adjust every month. Some only adjust periodically, such as quarterly, and some are fixed for up to 30 years," Mason Whitehead, producing branch manager at Churchill Mortgage in Dallas, explains. In that latter scenario (with a fixed-rate HELOC), falling HELOC rates wouldn't impact your rate or payment at all. "It's important to understand what type of fixed period, if any, you are getting," Whitehead says. "Know how often it will adjust." Compare your home equity borrowing options online now . Unfortunately, HELOC rates can also rise , which would send the rate and payment up on new and existing variable-rate HELOCs, too. The good news is that despite what the prime rate does, HELOC rates can't jump substantially in any one period. Lenders will set rate caps for your loan, establishing a maximum increase in each adjustment period and a maximum rate for the entire HELOC term. "It's possible that monthly payments could increase should market conditions change," says Chuck Bowman, retail and business banking division director at Amegy Bank of Texas. "When considering taking on a HELOC, it's important to be aware of rate caps, which set a limit on how high a borrower's interest rate can go. Rate caps can offer some protection against higher payments." For example, your rate may be able to increase by no more than one percentage point per year and five percentage points across the full term. These numbers should be detailed in your loan documents, so use them to calculate what your absolute maximum payment could be and see how that fits in with your budget. "The key with HELOCs — and essentially any debt — is to understand the worst-case scenario and make sure your budget allows that," Whitehead says. Since HELOC rates can rise or fall, changing your monthly payment with them, their biggest risk lies in their unpredictability. "HELOC borrowers are typically notified of rate changes through their monthly statements," Bowman says. "This means you find out about the new interest rate and upcoming payment each month. While this keeps borrowers informed, it doesn't always give ample time to adjust budgets." To make sure you're protected, run the numbers and figure out the highest payment you might owe — and make sure you can still handle that. You should also have some emergency savings on hand just in case. "Typically, the rates can change month to month which means the notification period on a rate change is 15 to 30 days," says Jason Fannon, a senior partner and certified financial planner at Cornerstone Financial Services in Novi, Mich. "This is difficult to plan for, which is why the borrower needs to run several scenarios — at higher interest rates — prior to obtaining the loan." Another option is to choose a lender that offers fixed-rate HELOCs or HELOCs with fixed-rate lock options. These allow you to fix the interest rate on a portion of your credit line at varying intervals throughout the loan term. This can be particularly helpful if you plan to use a large chunk of your credit line (which would mean even bigger fluctuations in payments if rates change). "If you plan to take a large advance on the line of credit, then how long do you expect to take to pay it back?" asks Tom Parrish, managing director of consumer lending product management at BMO Bank. "If it's over a long period of time, you may want to consider locking in a fixed rate and fixed payment to minimize any interest rate risk." You can also explore home equity loans , which have fixed interest rates (even though they may be slightly higher than HELOC rates right now). If you're not sure which option is best for your needs, talk to a mortgage professional for advice.
CBS News
21-04-2025
- Business
- CBS News
Are variable HELOC rates too risky now? Experts weigh in
Home equity lines of credit ( HELOCs ) are quickly becoming one of the most affordable ways homeowners can borrow money these days. Not only have HELOC rates fallen overall since the start of 2025, but they're also down considerably over the last year or so , falling from averages near 10% to the 8% point they sit at today. These lower rates have benefitted new borrowers and existing HELOC holders alike — allowing both to reduce their interest and monthly payments with every dip that occurs. But as the old adage says, "What goes up, must come down." And with HELOCs' variable rates , that means HELOC costs could rise, too. Does this make them too risky to take on? Compare today's top home equity borrowing options online now . Here's when experts say they might be too risky — and when you're typically good to go. Since HELOCs have variable rates, when overall interest rates change, so do the rates on existing HELOCs. That can be good in times like this — or if markets expect HELOC rates to fall further in the future. But those trends can be hard to predict. So to borrow a HELOC safely , experts say you'll want to understand the nitty-gritty details of your loan first — specifically, its rate caps, which determine how much your rate can rise or fall in any given time and over the life of your HELOC. "You need to know what the payment will look like if you fully draw out — or use all of — the HELOC at the maximum possible rate," says Mason Whitehead, producing branch manager at Churchill Mortgage in Dallas. "Understanding what the payment would be in that worst-case scenario is important." If you can handle that absolute maximum payment, then a HELOC could be safe for you to take out. Having "stable income, a low debt-to-income ratio and adequate savings reserves" can make a HELOC a safer bet, too, according to Chuck Bowman, retail and business banking division director at Amegy Bank of Texas. "Build an emergency fund to cover higher payments if interest rates rise unexpectedly," Bowman says. "Aim to save enough to cover a few months' worth of HELOC payments, and regularly monitor interest rates and market trends to anticipate potential increases." Find out how much a HELOC could cost you today . If you have unpredictable income, lots of debt or are low on savings, a HELOC with a variable interest rate is likely too big a risk for your finances, experts say. "A variable-rate HELOC can be risky, especially if you have a high debt-to-income ratio, meaning you already owe a lot compared to your income," Bowman says. "If your job situation is uncertain or your income varies greatly, managing variable payments can also be a challenge." Additionally, if you're on the cusp of qualifying for a HELOC , "that can be a big risk," too, Whitehead says. "What I tell a lot of clients is, 'Just because you can qualify, doesn't mean you should,'" Whitehead says. "Consider what the payment could be if the rate went up 2%, just to be sure you are okay with what that payment looks like." How you plan to use the HELOC plays in, too. For instance, using your HELOC funds to improve your home and add value to it is less risky than using the money to pay off debts — particularly if you haven't tackled the issues that led to racking up debt in the first place. "A big risk comes when you use a HELOC to pay off consumer debts, like credit cards or personal loans," Whitehead says. "Trading one debt for another may lower the monthly payment, but it's the behavior that has to change or else you will just end up back in credit card debt again — and you'll also have a HELOC." If you do opt to move forward with a HELOC, make sure you run the numbers. Know what your absolute highest payment could be, and have a plan for how you'd handle that from a budget standpoint. "Plan for rate changes in advance — prior to borrowing — and model out increases to ensure you can afford the loan at higher interest rates," says Jason Fannon, a senior partner and certified financial planner at Cornerstone Financial Services in Novi, Mich. "The planning needs be completed in advance." And if you want to reduce your risk even more, shop around for a fixed-rate HELOC. Some lenders offer these or, in many cases, you may be allowed to secure a fixed rate on a portion of your credit line, which can reduce your exposure to rate and payment fluctuations, too. There are also home equity loans , which typically come with a fixed interest rate , or you can explore a cash-out refinance if the conditions are right. Talk to a mortgage professional if you're not sure which is the right move for you.
