The Fed Raised Rates Again. Here's What That Means for HELOC Borrowers

Your home equity line of credit could get more expensive.

The Federal Reserve isn't happy with where inflation is at. The central bank made that clear at its March 21-22 meeting, during which it made the decision to raise its benchmark interest rate by 0.25%. That's the second rate hike of that nature this year, and it may not be the last.

To be fair, the Fed has good intentions. Rampant inflation has been hurting consumers for months, forcing them to do things like rack up credit card debt and raid their savings just to make ends meet.

The hope is that by raising interest rates, the Fed will prompt consumers to spend less and try to save more. If consumer spending declines, it can narrow the gap between supply and demand that's been causing inflation to surge.

But while rate hikes are bad news for consumers who are hoping to take out a loan, they're perhaps even worse news for consumers who are already in debt. And within that category, consumers who owe money on a home equity line of credit, or HELOC, may be in for a serious financial crunch in the wake of this recent rate hike.

Why rates hikes could spell trouble for HELOC holders

HELOCs can be very convenient. You get to tap your home equity for a line of credit you can access as you please within a certain time frame. HELOCs can also start out with competitive interest rates, since they're backed by home equity, thereby minimizing the risk to lenders.

The problem with HELOCs, though, is that they come with variable interest rates. When you take out a home equity or personal loan, for example, your interest rate is fixed, so your monthly payments under that loan are nice and predictable until it's paid off.

HELOCs don't offer that same benefit. And because their interest rates are variable, your HELOC payments have the potential to climb over time.

That's the risk HELOC borrowers face today. The Fed's most recent interest rate hike, coupled with previous ones, is likely going to drive HELOC rates up. The result? Higher monthly payments, and more struggles.

Should you avoid a HELOC right now?

It can be tempting to tap your home equity when you know you have a need or desire to borrow money. But right now, borrowing is expensive across the board, whether you're getting an auto loan, mortgage, or another type of loan. So if you're able to hold off on applying for a HELOC, that may be your better bet.

If you can't put off a loan application because you need to borrow immediately, consider tapping your home equity via a loan instead of a line of credit. In doing so, you'll get the benefit of a fixed interest rate on your loan and predictable installment payments you'll make over time.

The only downside of a home equity loan is that you'll have to commit to borrowing a single lump sum, whereas with a HELOC, you get more flexibility. But that flexibility could come at a very serious cost.