If you’re considering a home equity line of credit (HELOC) or already have one, you may already know the rate is variable.
Maybe you found out the hard way.
The Federal Reserve raised its federal funds rate 5% between April 2022 and August 2023. HELOC rates are indirectly tied to the fed funds rate.
If you’re worried that your HELOC rate will continue to rise, there’s good news. The Fed is likely done hiking rates for now. It may even cut rates soon.
Still, it’s good to know how high your HELOC rate can rise if things don’t go as expected.
Check today's mortgage rates.
How High Can HELOC Rates Go?
Many states set limits on HELOC rates. Other times, the lender will set its own limit. Often, the highest a HELOC rate can go is 18%.
Check your loan paperwork. Some lenders may allow for higher rates.
Many HELOCs set a lifetime rate cap and a maximum increase at each adjustment. For example, your loan may be able to rise only 1% per quarter. These caps protect consumers.
While the maximum possible rate can look scary, it doesn’t mean your rate will ever get this high. In fact, it’s unlikely.
That begs the question, what would push rates to “scary” levels?
Are 18% HELOC Rates Possible?
To see if HELOC rates could hit the high teens, we have to understand how these rates are formed.
Most HELOCs are tied to the prime rate. For instance, common HELOC rates are “prime plus one” or “prime minus one-half.”
At the time of this writing, the prime rate is at a historically normal 8.5%, though it feels like rates are high. That’s because rates have been quite low since 2009.
It all goes back to the federal funds rate, a key interest rate set by the Federal Reserve.
Federal Funds Rate, Jan. 1990 to Feb. 2024. While the rate seems high, it is at historically normal levels. Source: St. Louis Fed.
The prime rate is roughly 3% above the Federal Reserve’s federal funds rate, set at a committee meeting every six weeks. The federal funds rate currently ranges between 5.25 and 5.5%.
For a HELOC rate to rise to 18%, let’s see how high the federal funds rate would need to go, assuming a rate of prime plus one percent.
If the Fed Funds Rate Is… | Then the Prime Rate Is… | A HELOC Might Be (Prime + 1%)... |
~5.3% (current) | 8.5% (current) | 9.5% |
8% | 11% | 12% |
11% | 14% | 15% |
14% | 17% | 18% |
To reach the maximum rate for most HELOCs, the Federal Reserve would have to raise its rate from its current 5.3% to 14%. The federal funds rate hasn’t been that high since 1982.
The prime rate reaching 14% is quite unlikely since the Fed has indicated its intention to start cutting rates in 2024.
But if your HELOC rate is prime plus 4% or 5%, then it’s much more likely that you’ll experience rates in the low teens.
Could HELOC Rates Keep Rising?
The Federal Reserve never guarantees rate cuts. It remains “data dependent,” as it reminds us after every meeting.
The Fed’s primary concern at the moment is inflation. Year-over-year prices rose above the Fed’s 2% goal starting in 2021, launching its rate hikes. Inflation hit 4.69% per year in 2021 and 8.00% in 2022, four times the Fed’s target.
Inflation has slowed to 3.2% in the 12 months ending February 2024.
If inflation rises again, the Fed could keep its fed funds rate as-is or hike rates even more.
In the 1970s, high oil prices triggered record-high inflation and slow growth, termed “stagflation.” The Fed eventually increased its prime rate to 21%. Its goal: trigger a recession to tame inflation.
If inflation hits 2022 levels, the Fed could continue to hike its rate and HELOC rates would march upward with them.
But if inflation continues downward, HELOC rates could drop.
Because rising rates are always possible, you should make a plan.
Consult with a professional about your HELOC.
What To Do With Your Variable HELOC
It’s not always good to lock in your HELOC rate.
As mentioned, your rate can fall. If you lock in, your rate and payment doesn’t automatically improve with Fed rate cuts.
But if you’d rather be safe than sorry, you have options.
Cash-out refinance: You may be able to consolidate your HELOC and primary mortgage. This locks in your rate, assuming a fixed-rate refinance.
Check Today’s Conventional Loan Rates
Lock in a portion of your HELOC: Many HELOC lenders allow you to lock in all or part of your HELOC balance. This gives you a fixed rate on an existing balance and the flexibility to use the remaining credit line.
Refinance into a home equity loan: A home equity loan is like a HELOC except it’s an installment loan with monthly principal and interest payment, similar to your primary mortgage. These usually come with fixed rates.
Get Advice About your HELOC
Your HELOC is a useful tool but can become a burden if the rate rises too much.
Get solid advice from a professional about your options. Start now.
About The Author:
Tim Lucas spent 11 years in the mortgage industry and now leverages that real-world knowledge to give consumers reliable, actionable advice. Tim has been featured in national publications such as Time, U.S. News, MSN, The Mortgage Reports, and more.
