Should you borrow home equity now that the Fed has cut rates?

The financial landscape shifted dramatically this week when the Federal Reserve slashed its benchmark rate for the first time since 2020. But rather than conducting the widely expected 25 basis points cut, the central bank dropped its benchmark rate by 50 basis points instead, cutting the rate to a range of 4.75% to 5%. This sent ripples through the economy, which has for years been plagued by high interest rates across most lending products.

The Fed's aggressive rate hikes in 2022 and 2023, which were aimed at tempering inflation, resulted in steep borrowing costs on everything from personal loans to mortgages. And while home equity borrowing rates remained relatively low compared to other borrowing rates, they were still elevated by historical standards. So while the average homeowner has had a lot of equity to tap into recently, many have been waiting for the right moment to borrow from it.

Now that the Federal Reserve has finally cut rates, though, the question on many homeowners' minds is whether this is the right time to consider a home equity loan or a home equity line of credit (HELOC). The rate environment has become more favorable, after all, but is it enough to justify borrowing against one's home?

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Should you borrow home equity now that the Fed's cut rates?

The Federal Reserve's decision to cut rates could make tapping into your home equity more attractive now. With the benchmark rate decrease, we could see a subsequent drop in home equity borrowing costs in the coming days and weeks. This could translate into significant savings for homeowners looking to access the equity they've built up over the years.

And while there are numerous equity options to consider, one particularly appealing one in today's rate environment is a HELOC. HELOCs typically come with variable interest rates that are tied to the prime rate, which closely follows the Fed's benchmark rate. As a result, when the Fed cuts rates, HELOC rates tend to decrease as well. This means that if you open a HELOC now, you could potentially benefit from even lower rates in the future, as additional Fed rate cuts are expected later this year or early next year.

The flexibility of a HELOC also allows you to draw funds as needed, paying interest only on the amount you borrow. This can be particularly advantageous if you're unsure about the total amount you'll need to borrow or if you have ongoing expenses to account for, such as costs tied to a home renovation project that will be completed in stages.

However, it's important to remember that while lower rates make borrowing more affordable, they don't necessarily make home equity borrowing the right decision for everyone. Your financial situation, goals and risk tolerance should all play a role in determining whether now is the right time for you to tap into your home equity.

See how low of a HELOC rate you can secure here.

How to decide if home equity borrowing is right for you now

When considering whether to borrow against your home equity, there are several factors you should carefully evaluate, including:

• The purpose of the loan: Home equity borrowing can be a smart financial move if you're using the funds for purposes that add value, such as home improvements, debt consolidation or investing in education. However, it's generally not advisable to use home equity for discretionary spending or to finance a lifestyle beyond your means.
• Your financial stability: Before taking on additional debt, assess your current financial situation. If you're on shaky financial ground, adding more debt, even at a lower interest rate, could put you at risk.
• Your home's value: Most lenders require you to maintain at least 20% equity after taking out a home equity loan or HELOC. If your home's value has increased significantly, you may have more borrowing power than you realize.
• Your long-term plans: If you're planning to sell your home soon, borrowing against your equity might not be the best move. You'll need to repay the loan or line of credit when you sell, which could complicate the sale process or reduce your proceeds.
• Risk tolerance: Remember that by borrowing against your home equity, you're putting your home at risk if you can't repay the loan. Are you comfortable with this level of risk?
• Alternative options: Consider whether there are other ways to achieve your financial goals without tapping into your home equity. For example, if you're looking to consolidate debt, a balance transfer credit card or personal loan might also be worth looking at.

The bottom line

The Fed's recent rate cut has helped make home equity borrowing more attractive, potentially offering homeowners a chance to access funds at lower costs. However, the decision to tap into your home's equity should not be taken lightly. While lower rates provide an opportunity, they don't negate the inherent risks of borrowing against your home. By thoroughly evaluating your situation and considering all available options, though, you can make an informed decision about whether now is the right time for you to leverage your home equity.