Money Management

The Fed just raised interest rates by 0.25%. Read on to see how that might impact your existing HELOC. 

The Federal Reserve is on a mission to bring annual inflation back down to the 2% mark. That level, the central bank feels, is most conducive to economic stability.

But as of March 2023, annual inflation was stuck at 5%, as measured by that month’s Consumer Price Index. So clearly, there’s still work to be done by the Fed.

To that end, the Fed decided to raise its benchmark interest rate by 0.25% on May 3. It’s the third time since the start of 2023 that the central bank implemented an interest rate hike of that nature.

Unfortunately, interest rate hikes have been driving the cost of borrowing up for consumers. And so if you owe money on a home equity line of credit, or HELOC, you may need to brace yourself for higher payments in light of the latest rate hike.

Your HELOC might start to cost you more

The Federal Reserve does not set consumer borrowing rates. Personal loan lenders, for example, decide what rates to charge borrowers based on different factors that include credit scores, as do mortgage lenders. But when the Fed raises its benchmark interest rate, the cost of consumer borrowing tends to rise as a result.

Now, if you happen to owe money on a loan with a fixed interest rate, like a personal loan or home equity loan, then the Fed’s latest rate hike shouldn’t impact your existing debt. That’s because the interest rate on your loan is locked in. Rather, it’s HELOC borrowers who might run into issues with their payments increasing.

See, HELOCs tend to come with variable interest rates, so the rate on your HELOC could climb as you’re paying it off. That could, in turn, make your monthly HELOC payments more expensive. If you’re already struggling to fit those payments into your budget, things might get worse in the coming months, unfortunately.

Be careful when taking out a HELOC

Maybe you don’t currently have a HELOC. But if you’re thinking of taking one out, you may want to proceed with caution.

The nice thing about HELOCs is that they give you flexibility. You can get access to a line of credit and draw from it as needed over the course of multiple years (the specific time frame you have to work with will depend on the terms of your credit line, but it’s not uncommon to get 10 years to tap a HELOC).

The flipside of that, though, is that you’re not locking in fixed monthly payments on your HELOC. So during periods when interest rates rise, HELOCs can become costly and therefore dangerous.

Remember, falling behind on a HELOC may not just mean causing damage to your credit score. It could also mean putting yourself at risk of losing your home. Because it’s gotten so expensive across the board to borrow money, and because of the way HELOC interest tends to work, now’s really not the best time to tap your home equity and take out a line of credit.

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The Fed just raised interest rates by 0.25%. Read on to see how that might impact an existing or future home equity loan. 

The Federal Reserve has been eager to bring inflation down to a more moderate level. In fact, the central bank likes to target 2% inflation because it feels that at that level, the U.S. economy can thrive and grow.

But as of March, annual inflation was measured at 5%, as per that month’s Consumer Price Index. So clearly, the Fed can’t exactly back down if it wants inflation at 2%.

It wasn’t very surprising, then, to learn that the Fed opted to raise interest rates by 0.25% on May 3, marking the third rate hike of that nature since the beginning of 2023. Unfortunately, rate hikes on the part of the Fed have the potential to impact consumers negatively. So you may be wondering how the latest hike will affect your home equity loan.

The good news is that your existing home equity loan shouldn’t change in the wake of the latest rate hike. But you should also know that it’s a pretty bad time to apply for a new one.

Your rate is locked in

The Federal Reserve does not set consumer borrowing rates. Rather, it oversees the federal funds rate, which is what banks charge each other for short-term borrowing purposes.

But when the Fed raises interest rates, it tends to drive the cost of consumer borrowing up. So in the coming months, you might get stuck with a higher interest rate on a personal loan, auto loan, or home equity loan if you sign up for one.

That’s why now’s not a great time to apply for a home equity loan. Chances are, you’ll get stuck with a higher interest rate than you want, even if you happen to have excellent credit and plenty of equity in your home to tap.

That said, if you already have a home equity loan you’re making payments on, the latest Fed rate hike shouldn’t be cause for concern. The nice thing about home equity loans is that they come with fixed interest rates. So the payments you’re making now should not increase in light of the Fed’s latest hike.

HELOCs, or home equity lines of credit, are a different story. With a HELOC, you’re generally looking at a variable interest rate, so current HELOC borrowers could see their payments increase in the coming months. But if you have a home equity loan, you really don’t have to worry about that.

Hold off on a home equity loan

If you have a pressing need to borrow money, such as to fix a major issue with your home, then a near-term home equity loan application might be in your future, and that may be unavoidable. But if you’re looking to borrow money for a non-urgent matter, well, don’t.

Right now, the cost of borrowing is high across the board, so you’re generally looking at paying more interest no matter what type of loan you sign. If you’re borrowing to do something like renovate your home, and it can wait, then you may want to consider postponing your project until next year, or until borrowing costs start to drop. Otherwise, you might end up spending a lot of money on interest.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
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The Fed just raised its benchmark interest rate by 0.25%. Read on to see how that might impact personal loans. 

Consumers have been struggling with soaring inflation since mid-2021, to the point where many people have had to consistently delay bills, raid their savings accounts, and rack up debt just to stay afloat. The Federal Reserve is well aware that rampant inflation is a problem. And it’s been implementing interest rate hikes since early 2022 in an effort to slow down the pace of inflation.

On May 3, the Fed raised its benchmark interest rate by 0.25% for the third time in 2023. That move wasn’t particularly surprising, either, seeing as how the central bank has pledged repeatedly that it won’t stop raising interest rates until inflation reaches the 2% mark. As of March, it sat at 5%, as measured by that month’s Consumer Price Index.

But while interest rate hikes may be necessary to bring inflation down to a more moderate level, they’ve been hurting consumers by driving the cost of borrowing up. And so if you’re looking to take out a personal loan, you may find that the interest rate you qualify for isn’t one you’re particularly happy with.

A personal loan might cost you big time

The Federal Reserve does not set consumer borrowing rates, like personal loan rates, auto loan rates, and mortgage rates. But when it raises its benchmark interest rate, the cost of consumer borrowing tends to rise.

If you have plans to take out a personal loan, you may want to rethink them. If you apply for one of these loans in the near term, you might end up getting stuck with an interest rate that’s way higher than what you want it to be.

Now, you should know that the higher your credit score when you apply for a personal loan, the more favorable an interest rate you’re likely to qualify for. But unfortunately, because borrowing rates are already so high, you might end up with a less favorable rate on a personal loan even if your credit score is outstanding.

Your existing personal loan won’t be affected

One of the benefits of borrowing with a personal loan, as opposed to a credit card or home equity line of credit, is that the interest rate on your loan is fixed. That means you’ll have the same monthly payments throughout the life of your loan (assuming you don’t refinance it, but that’s something you would need to actively do).

As such, if you’re already in the process of paying off a personal loan, you can rest assured that the Fed’s latest rate hike won’t result in higher costs or payments for you. It’s consumers who are now seeking out personal loans who might be impacted by the latest uptick in interest rates.

It pays to wait

You may be eager to take out a personal loan to do something like renovate your home. But if your need for money isn’t urgent, then it could work to your benefit to hold off on taking out a personal loan. The cost of doing so right now is apt to be high regardless of your credit profile. So if you can wait until borrowing rates drop across the board, that’s really a better bet.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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This Mother’s Day, you may want to be on the giving end of a gift instead of the receiving end. Read on to see why giving the gift of life insurance is so important. 

Mother’s Day will be here before we know it, and if you’re a mom, you may be eagerly anticipating it. After all, you’ve given everything to your kids. And now, you deserve a day of gifts and pampering.

Hopefully, your kids will come through and surprise you with something special. But this Mother’s Day, you may want to take the opportunity to give your children a gift that’s not only extremely meaningful, but downright essential.

Get ready to apply for life insurance

Around 50% of Americans did not have life insurance coverage as of 2022, according to Annuity.org. If you fall into that statistic, then now’s the time to look at putting a policy in place. In fact, you may even want to make your life insurance application your Mother’s Day gift to your kids.

Without life insurance, your children and family might struggle financially in your absence. And to be clear, this holds true whether or not you work.

If you have a job, your income no doubt helps your family financially. So it’s important to have a way to replace it if you’re gone.

But even if you don’t earn an income, if you stay home with your kids, you’re contributing to your family in another meaningful way. You’re caring for your children and, most likely, doing the shopping, cooking, and cleaning while your partner works.

If you were to pass away, your family would most likely need to pay for childcare, not to mention the many other things you do. So even if you don’t bring home a paycheck, it’s still important to get a life insurance policy.

How to choose the right life insurance

When it comes to buying life insurance, you have choices. You could get a whole life policy to cover you permanently, or you could buy term life insurance, which only gives you coverage for a preset term, or period of time.

The idea of permanent coverage might give you more peace of mind. But you should know that term life insurance can be far less expensive than whole life insurance. So for that reason alone, term life insurance may be a better choice. Plus, if you want to put coverage in place so your kids are protected through adulthood, you could opt for a 20-, 25-, or 30-year term, depending on the age of your children.

Now, when it comes to the amount of life insurance you buy, that can be tricky if you’re not working. Usually a good rule of thumb is to replace 10 times your income or more.

It’s a little harder to calculate a life insurance benefit when you don’t earn an income. So in that case, imagine the expenses your family might incur in your absence and do your best to come up with a solid number. You may, for example, want to calculate the cost of full-time childcare until your kids are school-aged, and then the cost of after-school care until they’re old enough to be home by themselves.

You absolutely deserve your share of special things on Mother’s Day. But if you don’t have life insurance, that’s one gift you should strongly consider giving your children and family. And you may find that the simple act of putting a life insurance policy in place allows you to sleep easier at night, too.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
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