The Federal Reserve Has Paused Rate Hikes. Here's What That Means for HELOC Borrowers

Inflation has been wreaking havoc on consumers since mid-2021, and the Federal Reserve has been desperately trying to bring it down to a more moderate level. Thankfully, it's been reasonably successful. Though inflation isn't quite where the Fed wants it to be, we're getting closer. And the Fed is aware that good progress is being made.

As such, after 10 consecutive interest rate hikes that began in March 2022, the Federal Reserve opted to hit pause on rate hikes during its June meeting. And that's a very good thing for people who owe money on a home equity line of credit, also known as a HELOC.

The problem with HELOCs

When you take out a personal loan or home equity loan, you sign a loan at a fixed interest rate. This means that unless you refinance your loan, you're guaranteed to have the same monthly payments until your debt is whittled down to $0. 

But HELOCs work differently. Like credit cards, the interest rate you're charged on a HELOC can fluctuate based on market conditions. And if your HELOC rate rises, your payments on that HELOC can become more difficult to keep up with.

Such is the problem many HELOC borrowers are facing today. The Fed's recent interest rate hikes have driven borrowing costs upward. And so now, a lot of people are facing higher interest rates on their HELOC balances.

However, the fact that the Fed just hit pause on interest rate hikes could mean that your HELOC rate won't rise so drastically in the near term. And that's a good thing.

Of course, we don't know what the Fed will do at upcoming meetings this year. Much of that will likely depend on how inflation levels trend. But if inflation continues to cool, the central bank will hopefully continue to keep rates flat rather than raise them, giving consumers across the board some relief from soaring borrowing costs.

A home equity loan may be a better choice

Tapping home equity can be a good way to borrow money when you need to. But rather than sign up for a HELOC, you may want to consider getting a home equity loan instead. That way, you can lock in fixed monthly payments that won't rise on you over time.

Remember, any time you fall behind on debt payments, you run the risk of causing damage to your credit score. But when you fail to keep up with your HELOC payments, you also run the risk of losing your home. That's because your HELOC is secured by your home. And your lender can, in an extreme situation, seek to force the sale of it to get repaid if you've fallen very behind.

Of course, the appeal of HELOCs is that they offer flexibility. You can sign up for a line of credit and draw from it as needed through the years, whereas with a home equity loan, you're borrowing a single sum at once. But due to the risks involved, you may want to stick to a home equity loan if you'll be borrowing against your home.