Time To Tap Your Home Equity Despite The Fed Pause?

The Federal Reserve opted to leave rates unchanged at its July 2025 meeting, the fifth such move in a row. That’s in contrast to last year, which saw three successive cuts and a corresponding drop in home equity loan and home equity line of credit (HELOC) costs. Should the Fed’s holding pattern alter your feelings about borrowing against your home? If you already have a HELOC, can your rate still change? Is now a good time to take out a second mortgage? Let’s break down what you need to know about tapping your equity today.

How does the Fed impact HELOCs and home equity loans?

When the Fed cuts interest rates, the impact on HELOCs and home equity loans can be immediate, but it varies, reflecting the different nature of these two forms of borrowing.

HELOCs typically have variable interest rates that are directly tied to the prime rate, which usually moves in tandem with the federal funds rate (the benchmark interest rate that the Fed adjusts). A change in the fed funds rate eventually hits your HELOC.

“When the prime rate drops, the interest rate on variable rate HELOC account balances will also drop by a similar amount, resulting in lower interest payments for the borrower,” says Charlie Wise, senior vice president and head of global research and consulting at TransUnion.

On the other hand, home equity loans typically have fixed rates, set when you take out the loan. If you currently have a home equity loan, it won’t be affected by any move the Fed makes. Of course, new home equity loans can, and do, reflect any rate changes: You might see the new numbers advertised within a few weeks.

Overall, of the two, HELOCs are more responsive to the central bank’s moves. Lenders usually offer better deals on new lines of credit following a Fed rate cut, while “existing HELOC borrowers will see their rates march lower at the same pace the Federal Reserve cuts benchmark interest rates,” says Greg McBride, CFA, chief financial analyst at Bankrate. “Historically, there has been less interest rate sensitivity on fixed-rate home equity loans when rates are falling. Borrowers seeking out home equity loans will need to shop around, as not all lenders will be reducing interest rates and certainly not at the same speed.”

How much could you save?

How much would a quarter-point rate drop (the size of the Fed’s December 2024 cut) save you? The exact amount will depend on the size of your loan or line of credit and its remaining term.

Let’s say you have a $100,000 HELOC balance and your current rate is 8.25 percent. With a quarter-point cut, your rate could drop to 8.00 percent, depending on how the terms of your loan are structured.

That could save you about $21 a month, or almost $250 a year. That adds up to approximately $5,000 over 20 years — the typical HELOC repayment term length. (We’re assuming your loan averages that rate for the entire length of time.)

It’ll happen fairly quickly, too.

“HELOC borrowers should see their rates move lower in response to any Fed rate cut, usually within one to two statement cycles, sometimes with a three-month lag,” McBride says.

Alternatively, say you’re considering a 20-year home equity loan in the amount of $100,000. Its rate has just dropped from 8.4 percent to 8.15 percent. That quarter-point cut could save you almost $16 a month or about $190 a year. That sounds small, but it adds up to more than $3,700 over the loan’s lifespan.

Should you tap your home equity now?

Regardless of what the Fed does —and it still has cuts in mind for 2025 — is this the opportune time to tap into housing wealth?

The average mortgage-holding homeowner is sitting on approximately $212,000 in tappable equity, according to ICE Mortgage Technology, which could be used for anything from reducing debt to investing to renovating.

“It is a great time to tap into your home equity with a home equity loan or a HELOC, as [home] values are still high and consumers have built equity in their homes,” says Sarah Rose, senior home equity manager at Affinity Federal Credit Union. “A lot of people, understandably, do not want to refinance their first mortgage, as they still have significantly lower interest rates. However, a home equity loan or a HELOC allows you to access the equity without refinancing your first mortgage.”

While HELOCs and home equity loans tend to have lower rates than unsecured personal loans and credit cards, they are not super-cheap. As of the end of July, the average home equity loan rate is 8.25 percent, while the average HELOC rate is 8.26 percent.

In fact, rates for both products are now trading in parity, which is something to consider, especially when comparing options. If you borrow a substantial, five-figure sum — the minimum that many lenders insist on — that interest can make your debt multiply fast.

However, Rose says the declining rate market may give adjustable-rate HELOCs the edge: “When the rates go down, so does the interest on the HELOC.”

Don’t forget: The debt is backed by your home as collateral, so you could lose it if you can’t repay the loan or line of credit.

Where are home equity rates headed?

The Fed cuts last year caused home equity borrowing costs to drop. From a near-10 percent peak in September 2024, average HELOC rates have fallen nearly two percentage points, according to Bankrate’s national survey of lenders. Home equity loan rates have also dropped and are near their lows for the year.

Provided the Fed resumes cutting interest rates in the second half of the year, McBride is holding to his forecast that HELOCs will end 2025 averaging 7.25 percent and home equity loans, 7.90 percent. 

“That being said, the right product choice for you isn’t dependent solely on the rate, but the particulars of how you need access to funds and handle repayment,” McBride says.

Should you refinance your home equity loan?

If you currently have a home equity loan, refinancing can make sense if interest rates have dropped significantly since you took out the loan. The general rule of thumb is to refinance only if you can reduce your interest rate by at least one percentage point, but in some cases, even half a point can make a big difference.

Not only can refinancing reduce your monthly payments, but it can lower the total interest paid over the life of the loan. Don’t forget, though: Refinancing isn’t free. Expect to pay some closing costs.

Rose says homeowners should ask these questions:

• Are there fees to refinance or early termination costs?
• Will the reduced payment make up for these charges?
• How much is the rate reduced and how much will your payment go down?
• Is it beneficial in the long run to add on the additional term of the loan if needed?

“Everyone’s situation is different and people need to consider what the best option is for their personal circumstances and financial needs,” Rose adds.