The Federal Reserve recently hiked interest rates, meaning holding a variable-rate home equity line of credit (HELOC) is financially disadvantageous for most homeowners. If you hold an adjustable-rate home equity line of credit, this might be the best time to explore a fixed-rate loan options for HELOCs. Some lenders are providing fixed-rate options for HELOCs for homeowners looking to exit their adjustable-rate HELOC without a punitive impact on their finances in a rising-rate economy.
Transition to a Fixed-Rate Before the Federal Reserve Acts Again
Economists far and wide anticipate the Federal Reserve will alter the fed funds rate, affecting the prime rate and subsequently hiking the interest rates of variable-rate HELOCs. The next interest rate hike could come as soon as the upcoming financial quarter. The worst-case scenario is sequential interest rate hikes that send the adjustable interest rates of variable-interest rate HELOCs higher and higher.
If you have an adjustable-rate home equity line of credit, you should be aware that the clock might be ticking. The longer you wait to convert your adjustable-rate HELOC into a fixed-rate loan, the more you will likely pay as interest rates climb higher and higher.
The Federal Reserve’s logic in warning adjustable-rate HELOC holders of impending interest rate bumps is to help them brace for the negative financial impact of those hikes. Respect the Fed’s utilitarianism, acknowledge the increasing likelihood of several quarter-point interest rate hikes before the end of the year and take action by converting any variable-rate loans to a fixed-rate loan option.
Though some adjustable-rate HELOC holders will hold steady, refusing to adjust their original HELOC in anticipation of rate stagnation or to avoid loan closing fees, forward-thinking homeowners will consider shifting to a fixed-rate loan option as the interest rate saga plays out to stabilize interest charges.
Benefits of Converting to Fixed-Rate Debt
Adjustable-rate HELOC borrowers should view the latest Federal Reserve interest rate hike as an opportunity to refinance their debt. Instead of playing the waiting game to see if the Federal Reserve continues to hike interest rates, be proactive to convert debt to competitive fixed rates that offer stable monthly payments from month to month.
Even if the Federal Reserve raises interest rates half a dozen times before the end of 2022 and continues hiking rates thereafter, your fixed-rate debt will stay at the original rate locked in when signing the paperwork for the line of credit.
Converting to Fixed-Rate Debt Still Earns Competitive Rates
In 2022, home equity loans, which typically feature fixed rates, often originate with higher interest rates that comparable HELOCs. This has helped to see the popularity of HELOCs grow, where borrowers see an initial variable rate beating any home equity loan offers they receive.
While HELOC lenders couch the risk of lower initial rates with the potential variability to match the movement of the economy, borrowers now have a tool to convert their HELOCs to fixed rates, after enjoying the flexible borrowing a HELOC provides.
As the Federal Reserve continues to move rates upwards, consider HELOCs that feature this fixed-rate option, in a world of fluctuating Federal rates, it could provide stability.