Fed funds recently increased the rate by 75 basis points. This change to monetary policy also means your home equity line of credit costs more. The following is what you must know about a home equity line of credit…
Home equity lines of credit are tied to the prime rate which is the Fed funds rate plus a margin of three. Generally, to get a home equity line of credit it’s prime plus the bank margin. The margin is what they collect as their profit for providing you the line of credit. So prime plus two for example would mean that 2% is what the bank’s profit is on your home equity line of credit is.
Everyone who has a home equity line of credit that holds a balance will now expect their payments to be higher in July. The reason for this is because the federal funds rate was increased seventy-five basis points and the prime rate trails the Fed funds rate. In fact, it’s almost the same thing plus a margin of three so expect your payment to go up on July 1st.
As the Fed continues to hike interest rates to combat inflation throughout the rest of 2022 it’s reasonable to expect payments on home equity lines of credit to rise. Remember you only have a pay increase if you have a balance on the home equity line of credit. As a result of these increased borrowing costs, it’s important to know home equity lines of credit are no longer tax deductible. A home equity line of credit could help bridge the gap between needing cash for your home improvement project without touching your low rate on your first mortgage. However, if you have other debt such as credit cards which are also tied to the prime rate, and various other consumer loans a consolidation mortgage to pay this debt off via redoing the first mortgage might be a more cost advantageous situation.
Considering the deductibility and the consolidation of all debts in your life. It’s understood that as costs across the country continue to rise as a result of inflation it’s probable that the bank’s margins will soon start to follow which means it might not be prime plus a margin of one or two anymore. It might be a margin of three or more. So, it’s realistic to think that the banks are going to wise up to this and they’re going to follow suit by increasing their margins making your cost of funds cost even more. These are things to think about as it relates to getting a home equity line of credit and what the best way for accessing your home equity truly is.
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