What the inflation news means for home equity rates

While the inflation rate has dropped significantly from its peak of 9.1% in June 2022, it appears that we may not be out of the woods just yet. The latest inflation report, released today, shows that inflation ticked back up again in January, with consumer prices rising by 3.1% from a year earlier. That's slightly higher than the forecasted figure of 2.9%. 

While that rate was a slight improvement from December, when the inflation rate was at 3.4%, last month's uptick still rings alarm bells. For starters, it shows that Americans are still spending a lot more on necessities like groceries and housing. After all, food prices have surged by 25% and rent prices have increased by 22% since 2020, and this new uptick in inflation only adds to the issue. 

And the January inflation data will also play a crucial role in shaping the Fed's interest rate decision at its March meeting — a decision that has a big impact on what people pay to borrow money. With last month's inflation rate still well over the Fed's 2% target rate, it's unlikely that we'll see a significant rate drop in the very near future. But what does today's inflation news mean for home equity rates in particular? Let's find out how today's news could impact borrowers who are considering home equity loans.

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What the inflation news means for home equity rates

The good news is that the new inflation data is unlikely to have an immediate impact on home equity rates. After all, the Fed just recently opted to pause rate hikes again for the fourth consecutive time — so its benchmark rate has remained steady at a 23-year high. 

But if the Fed opts to raise rates at its meeting next month in response to today's persistent inflation issues, it would almost certainly cause an uptick in home equity rates. And if you wait to tap into your home's equity, that, in turn, would result in you paying more in interest on the money you borrow.

For now, though, any home equity loan rate increases are likely to be minor in response to the inflation report. So if you've been thinking about taking out a home equity loan, this may be the time to make your move. After all, current home equity loan rates are still much lower than what you would get with many other types of lending products — like credit cards — and you always have the option to refinance your loan in the future if rates drop. 

If you're planning to wait for a rate drop before borrowing from your home equity, though, it could be a while. Most economists anticipate that the Fed will likely wait until at least mid-year to start cutting its benchmark rate back from its current rate of 5.25% to 5.50%. Any potential rate cut would also be dependent on where inflation heads, so waiting to see what happens could be an expensive gamble to take.

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How to get the best home equity loan rate right now

If you want to get the best home equity loan rate possible, here are some strategies to help you secure a top interest rate amidst today's inflation uncertainty:

• Improve your credit score: While your credit score is just one factor that's considered when borrowing money, a higher credit score often translates to better loan terms. Take steps to improve your credit score by paying bills on time, reducing debt and checking your credit report for errors.
• Shop around: Compare rates and terms from multiple lenders to ensure you're getting the best deal. And don't hesitate to negotiate with lenders to secure favorable terms.
• Consider a fixed-rate loan: In a rising interest rate environment, a fixed-rate home equity loan provides stability and predictability. Locking in a fixed rate can also protect you from future rate hikes.
• Explore alternatives: You can also evaluate alternative financing options such as home equity lines of credit (HELOCs), which come with variable rates that fluctuate with the wider rate environment. Each option has its pros and cons, so weigh them carefully based on your financial needs and goals.

The bottom line

While home equity loan rates are likely to remain unchanged for the time being, the specter of inflation looms large, signaling the potential for Federal Reserve rate changes in the future. If that happens, home equity loan rates are almost guaranteed to feel the impact, so if you want to borrow money from your home's equity, you may want to do so now. After all, it's nearly impossible to predict what could happen with rates in the future — and there are ways you can better your chances of getting the best home equity loan rate possible. For example, by staying informed, being proactive and exploring various financing options, you can position yourself to secure the best possible home equity loan rate amidst today's inflationary uncertainty.