What Happens to a HELOC When the Fed Cuts Interest Rates?

Last updated: December 2025

Quick answer

When the Federal Reserve cuts interest rates, most HELOC interest rates decrease as well. That’s because HELOCs are typically tied to the prime rate, which follows the Fed’s benchmark rate. A lower Fed rate usually means lower monthly payments and borrowing costs for HELOC users, especially during the draw period.

How the Federal Reserve influences your HELOC

The Federal Reserve, often referred to as “the Fed,” sets the Federal Funds Rate. This is the rate at which banks lend to each other overnight. This benchmark influences nearly all forms of consumer credit, including home equity lines of credit (HELOCs).

Most HELOCs use the prime rate as their index. The prime rate generally moves in lockstep with the Fed Funds Rate. When the Fed cuts rates, the prime rate typically drops by the same amount, lowering your HELOC’s variable interest rate.

What is a HELOC?

Why your HELOC rate usually falls after a Fed cut

HELOCs are structured as variable-rate lines of credit, meaning their interest rates adjust periodically based on a benchmark index, usually the prime rate. Here’s how it works:

• Rate structure: HELOC rate = prime rate + lender margin
• Fed cut effect: If the Fed reduces the Federal Funds Rate by 0.25%, the prime rate drops by 0.25%
• Result: Your HELOC interest rate also falls by 0.25%, assuming your margin stays the same

This is why rate cuts often result in lower monthly payments for HELOC borrowers.

How does a HELOC work?

How fast does your HELOC rate change after a Fed decision?

Most HELOC rates adjust monthly or quarterly, depending on your lender’s terms. If the Fed announces a rate cut:

• Your lender updates the prime rate, often within days
• Your HELOC adjusts at the beginning of your next billing cycle
• The rate drop affects the interest charged on your outstanding balance

The rate change shows up on your next billing cycle, not instantly

What a Fed rate cut means for HELOC borrowers

Benefits:

• Lower monthly interest payments on your current balance
• Cheaper borrowing during your draw period
• Greater affordability for new draws from your HELOC
• Increased cash flow flexibility without refinancing

Considerations:

• Rates remain variable: future Fed hikes could reverse the benefit
• Rate floor may apply: some lenders won’t let your rate fall below a set minimum
• Payment type matters: if you’re in the repayment phase, savings may be smaller

Check your HELOC rate in minutes.

What to expect during the repayment phase

If you’re already in the repayment phase of your HELOC, a Fed rate cut can still lower your interest charges, but the effect may be less dramatic than during the draw period.

Repayment includes both principal and interest, so the portion affected by the rate change is smaller.

Over time, lower rates can reduce your total interest and speed up payoff.

Example: Fed cut vs HELOC rate

Let’s say you have a HELOC tied to the prime rate with a 1.00% margin.

If you had a $50,000 balance, your interest-only payment would drop from ~$396 to ~$375 per month. That’s a $21 savings.

Is it a good time to use your HELOC after a Fed cut?

If the Fed cuts rates and you have an open HELOC, it may be an ideal time to draw from the credit line. Lower interest means:

• More cost-effective home improvements
• Cheaper debt consolidation options
• Better financing for emergencies or short-term expenses

However, because HELOCs remain variable, monitor future rate expectations before borrowing large sums.

How to apply for a HELOC.

Should you wait to open a HELOC until after the Fed cuts rates?

If you haven’t opened a HELOC yet, rate direction matters, but so do other timing factors:

Reasons to open now:

• HELOC approval is based on current home value, income, and credit score
• Market conditions may tighten credit access later
• You can secure access now and draw later when needed

Reasons to wait:

• A Fed rate cut could reduce your initial interest rate
• You may get better terms from competing lenders post-cut

Ultimately, the right decision depends on your financial goals and timeline.

Can you lock in a low HELOC rate after a Fed cut?

Some lenders offer fixed-rate HELOC options, where you can:

• Convert a portion of your variable-rate balance to a fixed rate
• Lock in lower rates if you expect future Fed hikes
• Reduce the risk of rising payments during repayment

Ask your lender about rate lock features if you plan to use your HELOC long-term.

Use our HELOC calculator.

Use lower rates to your advantage with HomeEQ

When the Fed cuts interest rates, your HELOC becomes more affordable, especially during the draw period.

Even small rate reductions can add up over time. If you already have a HELOC, consider using it strategically while rates are low. If you’re still planning, now may be the right time to apply and lock in flexible access to equity.

Check your HELOC rate in minutes.

Frequently asked questions: HELOC when Fed cuts rates

Q: How does the Fed affect my HELOC interest rate?

A: The Fed sets the base rate (Fed Funds Rate) that influences the prime rate. Since most HELOCs are tied to the prime rate, a Fed cut usually lowers your HELOC rate.

Q: Do all HELOCs adjust after a Fed rate change?

A: Most do, but check your loan terms. Some HELOCs adjust monthly, others quarterly. A few may have fixed introductory periods or rate floors that limit changes.

Q: Will my HELOC rate go up again if the Fed raises rates later?

A: Yes. HELOC rates can increase if the Fed hikes rates in the future, since most are variable-rate loans that move with the prime rate.

Q: What’s a rate floor in a HELOC?

A: A rate floor is the minimum interest rate your HELOC can reach, regardless of how low the prime rate drops. It’s often stated in your loan agreement.

Q: Can I refinance my HELOC if rates go lower?

A: Yes. You may be able to refinance into a new HELOC with better terms, or convert your balance to a fixed-rate loan, depending on the lender’s options.