Be mindful of changes to your HELOC rate.
- The Federal Reserve approved a 0.25% interest rate hike on Feb. 1.
- When the Fed raises rates, it tends to indirectly drive up borrowing costs for consumers.
- Borrowers with variable interest rate lines of credit need to be mindful of interest rate hikes, as they could make their debt more expensive.
Inflation has been a problem for U.S. consumers since mid-2021, and the Federal Reserve is eager to do something about it. In 2022, it implemented a series of aggressive interest rate hikes in an effort to slow the pace of inflation.
Thankfully, some good progress has been made there. But inflation levels are still higher than usual, which means the Fed still has work to do.
It’s not surprising, then, that the central bank decided to move forward with yet another interest rate hike on Feb. 1. This time, however, the Fed is only raising interest rates by 0.25%, which is a far more modest increase than the four 0.75% rate hikes we saw in 2022.
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Still, if you owe money on a home equity line of credit, or HELOC, you should be mindful of the fact that interest rates are climbing again. While the Fed doesn’t set HELOC rates, its recent decision could make your debt more expensive to pay off.
The problem with HELOCs
Some types of debt come with fixed interest rates, like personal loans. But others, like credit card and HELOC balances, come with variable interest rates. This means your rate has the potential to rise over time, making your monthly payments more expensive and harder to manage.
Meanwhile, the Federal Reserve is not in charge of directly setting consumer borrowing rates. Rather, it oversees the federal funds rate, which is the rate banks charge each other for short-term borrowing purposes.
But when the Fed raises its federal funds rate, it tends to indirectly drive up the cost of consumer borrowing. And so if you owe money on any sort of loan product with a variable interest rate, you really need to be mindful of interest rate hikes as a whole, because they could end up impacting your debt and making it more expensive.
How to pay off a HELOC
Maybe you took out a HELOC to renovate your kitchen, or to fix a major problem with your home that couldn’t wait. Given that the interest rate on your HELOC has the potential to climb, you may want to do your best to pay it off ahead of schedule.
To pull that off, set yourself up with a budget that clearly accounts for both your essential and non-essential expenses. From there, try to cut back in the latter category, whether by canceling subscriptions you’re not getting a lot of use out of or dining at home instead of eating at restaurants several nights a week.
At the same time, you may want to consider taking on a side hustle and using the cash you earn from it to pay down your HELOC more quickly. Doing so could save you a fair amount of money over time.
Although the Fed’s latest interest hike wasn’t so aggressive, we could be in for similar rate hikes this year until inflation levels drop even more. And that could impact your outstanding HELOC. So if you’re carrying that sort of debt, paying it off ahead of schedule could really end up serving you well.
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