3 scenarios in which HELOC rates could drop in 2024

If you need a line of credit and you own your home, a home equity line of credit (HELOC) is a good option. You would be putting your home up as collateral, which means you'll generally get better rates than with other lines of credit. The downside to this, of course, is that if you default on your loan your home could be repossessed. As long as you've done your due diligence to make sure you can afford it, though, a HELOC can get you some cash flow to pursue myriad opportunities, from repairing your home to funding a new small business.

Right now, the average HELOC interest rate is 10.03%. That is rather high, but fear not – there are several scenarios in which the rates could go down in 2024. Since HELOCs are almost always variable-rate loans – meaning that your interest rate will change throughout the life of your loan – you can open a HELOC immediately and still benefit if rates go down in the future.

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3 scenarios in which HELOC rates drop in 2024

It's important to note that there is no way to know for sure what will happen with HELOC rates in 2024. Like most aspects of personal finance, many factors impact the rates offered for HELOC borrowers, and any one of them could cause a change to how much interest you are charged for the money you borrow. With that said, here are three scenarios where HELOC rates could well drop in the new year.

The Fed drops interest rates

This is the most obvious possible cause of a drop in HELOC rates next year. The main reason HELOC rates are so high right now is because the Federal Reserve has raised the federal funds rate repeatedly over the past 18 months. This has been in response to inflation, which peaked at more than 9% in June 2022. When inflation goes up, the Fed tends to raise rates in an attempt to discourage spending and encourage saving, meaning less money is flowing into the economy.

This plan has largely worked. Inflation cooled to just over 3% by October 2023 and is expected to have fallen again in November. If this trend continues, there is a good possibility that the Fed will lower rates in 2024 – though it might not come until the back half of the year.

If and when the Fed does lower the federal funds rate, it is reasonable to expect that the rates offered by banks for HELOCs will go down as well. Remember, HELOC rates are variable, so even if you opened a HELOC in 2023, this would benefit you going forward.

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Continued slowing of inflation

Even before the Fed chooses to lower the federal funds rate, though, a continued slowing of the inflation rate could lead to lower rates for HELOCs and other consumer lending products. When inflation is high, money has less purchasing power. While this tends to get a lot of coverage in the news for how it impacts consumers – the price of milk, fuel and other staples, for instance – it also impacts banks and other financial institutions. The money they are holding is less valuable, so they need to bring in more of it.

This leads to higher interest rates for loans, including HELOCs. As noted above, inflation is trending in the right direction. It could soon even reach the target rate of under 2% set by the Fed. If inflation continues to go down, the interest rate for HELOCs may track alongside it.

The economy enters a recession

A recession is technically defined as two consecutive quarters of negative GDP growth. If this happens to the US economy in 2024, HELOC rates could go down alongside other consumer lending products.

Essentially, when the economy is bad, people are less likely to want to spend and borrow money. Banks, in turn, need to attract more potential customers for their lending products. They do this by lowering rates. A recession could also force the Fed to cut the federal funds rate more quickly, causing HELOC rates to potentially go down as well. This is the least likely of the three scenarios mentioned here but it is a possible path toward lower HELOC rates that borrowers should be aware of.

The bottom line

A HELOC is a variable-rate loan, so even if you already have one you should be rooting for rates to go down in 2024. While predicting rates in the future is not easy, there are a few scenarios where it is easy to see HELOC rates going down, including a recession, lower inflation and action by the Federal Reserve. Do your research and explore your HELOC rate options now so you'll be prepared for these possible scenarios in the new year.