Why the Latest Inflation Data Is Great News for HELOC Borrowers

Inflation has been a problem since the latter part of 2021. And since then, many consumers have been forced to dip into their savings accounts and rack up balances on their credit cards just to stay afloat.

But Consumer Price Index (CPI) data from March reveals that inflation has finally started to cool to a really notable degree. And that could spell particular relief for borrowers with outstanding home equity line of credit (HELOC) balances.

Inflation is finally cooling

In March, the CPI rose 5% on an annual basis. That's far from what's considered a normal or moderate rate of inflation. But it's a big improvement from mid-2022, when annual inflation was a whopping 9.1%.

In fact, March's CPI reading was the lowest level we've seen since May 2021. It also represents nine consecutive months of declining annual inflation.

What does that have to do with HELOCs? It's simple. Since early 2022, the Federal Reserve has been raising interest rates in an effort to bring the rate of inflation down. But those interest rate hikes have driven up the cost of consumer borrowing. So over the past year and change, it's gotten more expensive to take out an auto loan, home equity loan, or personal loan.

Meanwhile, certain types of debt come with variable interest rates. Credit cards are one of them. So are HELOCs. This means that if you owe money on a HELOC, your interest rate has the potential to climb over time, making your debt more expensive.

The Fed, however, might end up so pleased with March's CPI reading that it opts not to raise interest rates at its next meeting. So far, it has already raised interest rates twice this year. If the Fed hits pause on its interest rate hikes, HELOC borrowers may not see such a drastic spike in their payments.

Is now a good time to take out a HELOC?

Because borrowing rates are up across the board right now, it's generally not a great time to borrow money, period. And that extends to taking out a HELOC.

What's more, HELOCs can be a riskier way to borrow money because you're not locking in a fixed interest rate. So your monthly payments under a HELOC have the potential to rise over time, making them less affordable.

That said, property values are still elevated in most U.S. markets. And if you've been in your home for a long time, you may, at this point, have a nice amount of equity built up.

So if you're looking for a way to borrow against that equity, a home equity loan may be a better bet. This way, you'll sign a loan with a fixed interest rate so you're assured that your monthly payments won't rise as you're trying to get that debt paid off.

Of course, if you can avoid borrowing money right now, that may be your best bet. But if that's not possible, then you may want to borrow in a manner where at least your interest rate is locked in.