Owe Money on a HELOC? You May Want to Try to Pay It Off ASAP

Moving quickly could work to your benefit.

Inflation has been battering consumers for well over a year now, forcing them to resort to drastic measures like skipping out on bills and racking up credit card debt just to stay afloat. And unfortunately, inflation doesn't seem to want to slow down.

In January, the cost of consumer goods rose 0.5% compared to the month of December. And that increase is unlikely to sit well with the Federal Reserve.

In fact, there's a good chance that the Fed's next interest rate hike will be an aggressive one given this recent inflation reading. And so if you owe money on any sort of debt with a variable interest rate, like a home equity line of credit (HELOC), then you may want to work on getting it paid off as quickly as you can.

Get ahead of that HELOC if your finances allow for it

The Federal Reserve is really eager to see inflation levels cool. And now that inflation has risen on a monthly basis, the Fed is likely to implement a larger interest rate hike during its next meeting, which is scheduled for the end of March.

Now, one big point of confusion that tends to stem from the Federal Reserve is that it's responsible for determining what consumer borrowing rates look like. That's not true.

The Fed is tasked with establishing the federal funds rate, which is what banks charge each other for short-term borrowing. But when the Fed raises its benchmark interest rate, consumer borrowing rates tend to rise as a result. And that's why now's a good time to pay off an outstanding HELOC.

The great thing about HELOCs is that they give you a fair amount of flexibility. Rather than commit to a single loan amount, with a HELOC, you get access to a line of credit you can draw from during a multi-year time period.

But the downside of borrowing with a HELOC is that you're generally looking at a variable interest rate on the sum you borrow. That means the cost of repaying your HELOC could rise over time. And given that consumer borrowing rates could skyrocket following the Fed's next rate hike, you may want to get moving on repaying your HELOC now.

Of course, if money is tight -- which is the case for many people due to inflation -- then that may not be possible. But if you have some flexibility in your budget, it pays to allocate extra money to getting that HELOC paid off.

Be careful with a HELOC

Many homeowners are drawn to HELOCs because in some cases, they can be fairly easy to qualify for. And the interest rate you start out with on a HELOC might seem competitive, especially compared to a product like a personal loan.

But any time you subject yourself to variable interest, you take a risk. So if you're thinking of first applying for a HELOC now, proceed with caution, especially at a time when consumer borrowing rates have the potential to be volatile.