What the latest inflation report means for home equity loans
While inflation has cooled significantly compared to this time last year, it appears that the Fed's benchmark rate hikes over the last year haven't fully tempered it just yet. Annual consumer inflation remained unchanged in September from the 3.7% increase in August, according to the most recent inflation report from the Labor Department — which isn't great news for borrowers.
With high inflation comes rising interest rates, and over the last 12 months, borrowers have already faced increased costs on everything from credit cards to mortgage loans. And, it's likely that those costs will continue to rise as the Federal Reserve tries in the coming months to tamp down inflation to its 2% target rate.
In this environment of inflationary pressures, it's important to consider how these conditions might impact your financial decisions, especially when it comes to home equity loans and home equity lines of credit (HELOCs). After all, inflation can have significant implications for these borrowing options, too.
Start exploring your home equity options here to see what rate you qualify for.
What the latest inflation report means for home equity loans
There are a few different ways that home equity loans and HELOCs could be affected by the latest inflation report, including:
Future rate changes
With September's inflation rate holding at the same level as August, it keeps the door open for another potential interest rate hike by the Federal Reserve later this year. If that happens, the rates on home equity loans and HELOCs are likely to increase in tandem, as borrowing will become more expensive for banks — and the costs will be passed on to you, the consumer. So, if you wait to borrow from your home equity and rates increase, you could end up paying more in total for your loan than you would if you borrowed today.
But the good news is that, if you borrow from your home equity with a HELOC, your interest rate may have the potential to decrease in the future. Unlike home equity loan rates, which are fixed, HELOC rates are variable and can decrease alongside changes in the federal funds rate. So, in an environment marked by stubborn inflation, opting for a HELOC might be the more flexible choice.
Learn more about the home equity rates you could qualify for here.
Increased home values
During periods of heightened or stubborn inflation, the value of homes tends to increase. This phenomenon is primarily a result of the general rise in prices and overall economic conditions. As consumer prices surge, so does the nominal value of real estate properties. This increase in property values is beneficial for homeowners who are considering tapping into their home equity.
That's because lenders typically permit borrowers to access a portion of their home equity — usually a maximum of 85% or so. And when inflation is on the rise, your home's market value generally experiences an upswing, potentially enabling you to borrow more than you would in times of lower inflation.
This can be a pretty significant benefit for current homeowners, especially when you require access to a substantial amount of funds. While credit cards often limit your borrowing capacity to relatively modest amounts, and personal loans typically have upper borrowing limits, a home equity loan or HELOC can provide you access to more significant sums.
Sustained affordability
Stubborn inflation, as we've witnessed recently, can lead to some challenges in the financial landscape. However, when it comes to home equity loans and HELOCs, this persistent inflation has a somewhat unexpected silver lining — it keeps these financing options comparatively affordable.
While inflation typically drives up interest rates across various financial products, home equity loans and HELOCs remain relatively stable in the face of inflationary pressures. So, despite the overall cost of borrowing climbing, the rates for these home equity options have remained reasonable.
This stability is partly due to the way these loans are structured and secured against the value of your home. Lenders are often more lenient when it comes to maintaining reasonable interest rates on these loans, making them an attractive option when inflation is on the rise — or when it remains higher than the target rate.
The bottom line
A high inflation rate can result in increased interest rates for home equity loans and HELOCs, but it can also coincide with a rise in your home's value, potentially allowing you to access more significant funds. As a homeowner, it's essential to monitor inflation trends and carefully compare your borrowing options to make informed decisions that maximize your home equity and secure the financing you need.
