Should You Open a HELOC or Home Equity Loan Before the Fed’s July Meeting?

If you’re a homeowner looking to use the equity in your home, you may be wondering if it’s wise to do so in the short term before rates possibly change.

The Federal Reserve has kept the federal funds rate steady this year. This benchmark rate affects what people earn on savings accounts and what they pay on loans. The Fed will hold its next rate-setting meeting on July 29-30, but most interest rate traders currently predict we won’t see a rate cut until the September meeting.

Both home equity loans and home equity lines of credit (HELOCs) let you access your home’s equity—the amount of your home’s value that you own—but there are important considerations about which type is best for your situation, and that could help determine when it’s best to take one out with relation to the Fed’s next meeting. Your choice depends on factors like how you’d use the money and how long you’d need it, as home equity loans and HELOCs have different terms.

For instance, a home equity loan generally has a fixed interest rate, so locking one in could be smart at a time when rates are expected to rise. HELOC rates, by contrast, are typically variable and tend to move according to what the Fed does with interest rates. If the Fed cuts rates, that can impact the prime rate that loans are based on—and that can be good news for borrowers, because lenders end up offering lower rates, too. The timing for taking out a HELOC is less critical, since those lending rates will adjust with the overall rate environment.

When Should You Open a HELOC — Before or After the Fed’s July Meeting?

Because HELOCs have variable rates, they are likely to change if the Fed makes a rate change or if it appears probable that one is on the horizon. It’s important to factor this into your decision-making. If you take out a HELOC today, you can expect that your interest rate will drop if the benchmark rate drops. This means if you can afford the rate you’re offered on a HELOC today, you don’t necessarily have to wait. Your APR will remain competitive if and when the Fed lowers rates.

There are other considerations when choosing between a HELOC and a home equity loan. You get flexibility with a line of credit. You can borrow money when you need it, pay it back, and borrow more later if necessary, similar to a credit card. Jennifer Beeston, executive vice president of national sales at Guaranteed Rate and a mortgage educator on YouTube, recommends a HELOC to people who want access to money in an emergency. “I would say, ‘Do a home equity line and don’t touch it unless you need it.’” 

When Should You Open a Home Equity Loan — Before or After the Fed’s July Meeting?

In times when rates are expected to rise or stay high, home equity loans may be a smart option. “A home equity loan is generally going to be fixed and you’re taking out the full amount,” Beeston explained. She noted that this can be a good choice for projects like a home renovation, where a borrower can get a fixed rate for a long period of time. Just be sure to research the full cost of your project so your loan amount will be enough to cover the renovation cost.

But rates aren’t expected to rise—instead, they’re expected to fall later this year. Since your interest rate will be fixed at the time you take out the loan, it may be wise to wait until the fed funds rate has come down.

If you’re considering a home equity loan, being flexible with your timeline can pay off. If you have some wiggle room and aren’t under pressure to get a loan immediately, waiting until after the Fed makes a rate cut may allow you to lock in a lower interest rate. Given that home equity loans typically have repayment terms spanning 5 to 15 years, even a modest drop in rates can translate into significant savings over the length of your loan.

Why Researching Your Options Is the Smart First Step

Regardless of what the Fed does, you need to choose the right loan option for your situation. Before you compare HELOCs and home equity loans, make sure you know why you need the money, Beeston said. “There’s a lot of advertising right now that’s encouraging homeowners to take out equity lines and equity loans, but without a defined purpose, you can’t really choose which one you should take and if it makes sense at all,” she said.

In some cases a home equity product won’t be the right fit for your situation, especially if your income is unstable, you’re already in a large amount of debt, or you don’t have a solid repayment plan. Home equity products are generally not recommended for entertainment, like vacations.

In addition to knowing your “why” for a loan, you should shop around for lenders, understand the differences between loan options, and recognize that rates and fees are not the same for each product, according to Beeston. “Don’t just fall for a pretty rate,” she said.

There’s only a very slim chance the Fed will cut rates later this month, according to interest rate traders at The CME Group. But one or more downward rate movements are still expected sometime in 2025—so shopping around and speaking with a lender beforehand can help you prepare. If the Fed “did drop rates and you wanted to be able to act quickly, it’s good if you’ve already done your research,” Beeston said.