The Federal Reserve recently cut interest rates by a half-point, which is the first cut since 2020, and the largest cut in 16 years. While the Fed rates and mortgage interest rates aren’t directly correlated, they do tend to trend in the same direction, and, as such, many experts are predicting a drop in mortgage rates.
Which is great news for potential buyers. But what about the people that already own a home?
A recent article from realtor.com outlined the potential impact of the Fed’s rate cut on home equity as well as FAQs, including:
- Equity could go up. According to the article, U.S. homeowners have an average of $315,000 of equity in their home. But historically, as mortgage rates fall, home prices tend to increase, which means that the rate cut could actually help homeowners gain more equity in their properties.
- The cost of tapping into home equity will go down. Not only do homeowners stand to gain more equity, but the cost to tap into that equity will go down as well. When the Fed cuts rates, interest rates for home equity loans, HELOCs (which is a home equity line of credit), and existing variable-rate HELOCs generally go down as well, making it more affordable to borrow against your home equity.
- How much can homeowners borrow? With the recent rate cut, it will be more affordable to tap into your home’s equity, but how much of that equity can you tap into? While the average homeowner has $315,000 in home equity, that doesn’t mean they can borrow the full $315,000; most lenders will allow homeowners to borrow between 75 percent and 85 percent of their home’s assessed value.