Market Conditions Affect A Home Equity Loan Rate

Curious about how a home equity loan rate is set? If you're planning on pursuing a loan, it's to your benefit to understand the market dynamics. It can save you money in the long run.

Like other rates, a home equity loan rate is determined by where the government sets their benchmark rates. Many people think that if the government lowers interest rates, home equity loan rates naturally go lower as well. Not so fast.

Typically, home equity loan rates actually rise when the Federal Reserve lowers rates. Why? When rates are lowered, the "Federal Funds" rates are lower. It's the rate at which large banks lend funds to one another and is called a "short-term" rate. But mortgage rates are long-term - up to 30 years. And longer-term rates are sensitive to expectations about inflation. So when short-term rates fall - like the ones the Federal Reserve controls - borrowing and spending usually increase, which can actually cause inflation to rise. Longer-term rates, like mortgage rates, can rise when concerns about inflation increase.

Markets are often ahead of the Federal Reserve. Interest rates are determined every day in active public markets.

If those markets believe the economy is slowing....
Interest rates may fall as markets anticipate that the Federal Reserve might lower short-term rates. This happened in the last half of 2000 when mortgage rates began steadily dropping, even though the Federal Reserve left their short-term rates unchanged.

The opposite can happen as well....
Mortgage rates can rise well ahead of the Federal Reserve increasing short-term rates.

Always Compare Rates
You can save money on a home equity loan rate by shopping around and comparing quotes from all the different lenders that will compete for your business.

The more questions you ask, the more likely it is you will understand how to deal and negotiate with lenders. It’s that simple. Shopping for a home equity loan rate is like shopping for an auto loan. It takes time and negotiating skills, but in the end, you will reap the rewards. Remember lenders set rates according to what they think you will agree to, which means, the rates are negotiable.