Will HELOC Rates Go Down in 2025?

As of late 2024, HELOC rates remain a crucial consideration for homeowners. With the Federal Reserve implementing modest rate cuts, the 2025 outlook shows potential for slight rate declines. However, economic uncertainty and inflation continue to influence borrowing costs.

While modest decreases may occur, experts suggest significant reductions are unlikely. The Federal Reserve’s cautious approach and broader economic challenges will likely keep rates elevated for most of 2025. Understanding the factors driving HELOC rates is key for borrowers.

Table of Contents

1. What factors influence HELOC rates? 
2. Historical HELOC rate analysis 
3. Current HELOC rate environment 
4. HELOC rate projections for 2025 
5. HELOC rates vs. alternative financing options
6. Is now a good time to get a HELOC?

What factors influence HELOC rates? 

Home equity line of credit (HELOC) rates are tied to various factors that determine when they rise or fall. Borrowers should consider the following influences:

• Federal Reserve policies: The Federal Reserve is responsible for promoting stable prices and maximum employment. It largely achieves this by influencing interest rates. Raising or lowering rates directly impacts borrowing costs across many loan products, including HELOCs.
• Economic trends: Inflation, unemployment, and economic growth influence lenders’ costs and risk assessments. These trends affect the rates offered on HELOCs and other loan products, with inflation often leading to higher rates and slower economic growth.
• Market demand: The level of demand for HELOCs can also drive rate changes. Higher demand may push rates up as lenders adjust for increased borrowing, while lower demand often prompts more competitive rates to attract borrowers.
• Lender practices: Individual lenders set their HELOC rates based on factors like borrower risk, regional housing market conditions, and operational costs. This results in rate variations across lenders, making it essential for borrowers to shop around for the best terms.

These factors interact to create a dynamic interest rate environment, causing HELOC rates to rise and fall with broader economic changes. Borrowers who understand these influences are better positioned to navigate the market. 

Historical HELOC rate analysis 

The rates on HELOCs are commonly variable, meaning they adjust with market and economic conditions. When setting variable rates, banks charge a margin or spread over a standard base rate. This margin reflects factors like the borrower’s credit profile, property equity, and lender policies.

One of the most common base rates banks use is the prime rate. It often serves as a base rate for many lending products, including HELOCs. While each bank can set its own prime rate, it’s generally pretty consistent across the industry at about 3% above the Federal (Fed) Funds rate. 

The Fed Funds rate is set by the Federal Reserve and acts as the foundational interest rate for the economy. When the Federal Reserve raises or lowers this rate, it directly impacts the prime rate used by banks, which in turn influences HELOC rates. 

Raising or lowering the Fed Funds rate allows the Federal Reserve to use its monetary policy to guide interest rates, employment levels, and inflation throughout the U.S. economy.

HELOC rates over time

Historically, HELOC rates have followed broader economic trends. For example, during periods of high inflation, the Federal Reserve (Fed) has raised the Fed Funds rate, leading to higher prime rates and borrowing costs for many types of loans, including HELOCs. 

In the early 1980s, for instance, the Fed raised rates to nearly 20% to combat runaway inflation, which pushed the interest rates on many loan products to record highs.

Conversely, during economic downturns, the Fed has slashed rates to encourage borrowing. During the Great Recession of 2007 to 2009, the Fed Funds rate dropped to almost zero, with the prime rate dropping to record lows. This decrease led to low rates on many loans, including HELOCs. 

These shifts demonstrate the direct impact of monetary policy on HELOC affordability.

Recent trends

Over the past five years, HELOC rates have been highly volatile. In response to the COVID-19 pandemic, the Federal Reserve slashed the Fed Funds rate to near zero. This caused the prime rate—and HELOC rates tied to it—to fall, offering borrowers more affordable credit options.

However, as inflation surged in 2022, the Federal Reserve began raising the Fed Funds rate at an unprecedented pace. By late 2023, the prime rate exceeded 8%, significantly increasing the borrowing costs for variable-rate loans. 

A natural consequence of a rising interest rate environment is that borrowers with variable-rate loans—-such as many HELOCs—-will see their monthly payments climb, highlighting the risks of variable-rate borrowing during periods of tightening monetary policy.

As inflation began to stabilize in 2024, the Federal Reserve shifted its focus, leading to modest reductions in the Fed Funds rate, in turn lowering the prime rate. Since HELOC rates are often tied to the prime rate, this signals a modest easing of borrowing costs for many borrowers.

The following chart shows the variability of the prime rate over the past five years:

As discussed, HELOC rates are often tied to the prime rate, a common base rate lenders use. Lenders add a spread or margin above prime based on factors like creditworthiness and loan terms to determine the rate each borrower is charged.

For example, if the prime rate is 7.75%, a borrower with excellent credit might secure a rate of 6.75% (prime minus 1%). Meanwhile, borrowers with higher risk profiles might see rates of 10.75% (prime plus 3%) or even 12.75% or more (prime plus 5%).

These examples highlight why understanding lender-specific spreads is key to managing HELOC costs. Comparing offers from multiple lenders can help borrowers secure the most competitive terms.

While most HELOCs have variable rates, some lenders also offer fixed-rate options. Fixed-rate HELOCs provide predictability and stability, particularly during interest rate fluctuations. To provide an example, Figure and AvenCash both offered fixed-rate HELOC products: 

Current HELOC rate environment 

As of December 18, 2024, the Federal Reserve decided to reduce the federal funds rate by 0.25%, bringing it to a target range of 4.25% to 4.5%. This decision reflects ongoing efforts to manage inflation and support economic growth.

Why are HELOC rates so high?

Despite the recent rate cuts, HELOC rates remain elevated due to a couple of key factors: 

• Previous Fed rate hikes: Before the reductions the Fed made in 2024, it implemented a series of rate hikes to combat inflation. This led to higher borrowing costs across many loan products, including HELOCs.
• Economic conditions: Persistent inflationary pressures and economic uncertainties have contributed to lenders maintaining higher interest rates to mitigate potential risks and cover their internal costs. 

Are HELOC rates going down?

The recent federal funds rate reduction may signal a potential easing of borrowing costs. However, the Federal Reserve has indicated a slower pace of rate cuts in the upcoming year, projecting only two additional reductions in 2025 compared to the four previously anticipated.

Consequently, while HELOC rates may modestly decline, significant decreases are unlikely in the near term. Borrowers should remain attentive to economic indicators and Federal Reserve communications to stay informed about potential rate changes.

HELOC rate projections for 2025 

With the Federal Reserve implementing modest rate cuts in late 2024, many borrowers are curious about what to expect for HELOC rates this year. Projections suggest that while some relief may occur, significant decreases are unlikely due to persistent economic challenges.

Expert predictions

The Federal Reserve’s December 2024 rate cut and projections for fewer reductions in 2025 indicate a cautious approach to monetary policy easing. This decision reflects ongoing concerns about inflation and economic stability, which continue to influence borrowing costs across financial products.

Since HELOC rates often move with changes to the Fed Funds rate, these adjustments could lead to modest declines. However, the extent of any rate reductions will depend on how quickly lenders respond and broader economic conditions, such as inflation trends and market demand for credit.

Influencing factors

Several key factors are likely to shape HELOC rates in 2025, reflecting broader economic and market conditions:

• Federal Reserve actions: The Fed’s cautious approach to reducing rates will remain a primary influence. With only two additional rate cuts projected for 2025, significant decreases in borrowing costs may be limited.
• Inflation trends: Persistent inflation will likely keep lenders cautious, potentially slowing the pace at which HELOC rates decline. However, faster easing of inflation could create opportunities for lenders to offer more competitive rates.
• Housing market conditions: Changes in home values and buyer demand can impact HELOC rates. A strong housing market may encourage lenders to lower margins, while a cooling market could lead to more conservative lending practices.
• Economic uncertainty: Broader uncertainties, like geopolitical events or unexpected shifts in economic growth, may prompt lenders to maintain higher spreads to offset perceived risks.

While modest HELOC rate declines may occur in 2025, borrowers should remain mindful of these influencing factors when evaluating loan terms. Staying informed about economic trends and Federal Reserve actions will be critical for making sound financial decisions.

HELOC rates vs. alternative financing options

HELOC rates are typically higher than traditional mortgage rates, partly because mortgages are often in a first-lien position, making them less risky for lenders. HELOCs, by contrast, are usually second-lien loans, which increases lender risk and often results in higher rates.

Compared to home equity loans, which usually have fixed rates, HELOCs offer more flexibility but come with variable rates tied to economic conditions. Fixed-rate home equity loans provide predictable monthly payments, a key advantage in a volatile rate environment.

Looking ahead to 2025, modest HELOC rate declines may occur if the Federal Reserve continues its cautious approach to rate cuts. Fixed-rate products like home equity loans and mortgages may also see modest fluctuations depending on broader market trends.

Borrowers seeking stable costs may lean toward fixed-rate alternatives, while those valuing flexibility may still find HELOCs appealing.

When choosing a HELOC, compare at least three different options, and understand the pros, cons, and impact on your overall financial and life goals.

Erin Kinkade, CFP®

Is now a good time to get a HELOC?

With the potential for modest rate declines in 2025, now could be a good time to consider a HELOC, depending on your financial needs. It’s essential to weigh the pros and cons carefully, such as whether a variable-rate loan aligns with your comfort level for managing fluctuating payments.

Borrowers planning short-term projects or flexible spending may benefit from a HELOC’s revolving credit structure. However, if stability is a priority, opting for a fixed-rate HELOC could offer predictable payments, even if initial rates are slightly higher than variable options.

Before committing, evaluate how a HELOC fits your financial strategy. Consider current rates, alternative products, and your ability to handle potential payment changes. Shopping around and comparing lender terms can ensure you find the best option.