Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Is Quietly Eating Your Home Equity Line of Credit
Transcript
- Lucas: Luna, I want to talk about a line of credit that millions of Americans rely on — but I suspect most of them haven't checked the fine print since they opened it. I'm talking about the Home Equity Line of Credit. HELOC for short. Luna: Right, the HELOC. It's that variable-rate second mortgage that seemed like such a smart idea when rates were basically zero. But if inflation has done one thing, it's pushed rates up and kept them there. Lucas: Exactly. And the numbers today are stark. The effective Fed funds rate is 3.63 percent — that's where we are in July 2026. But HELOCs are priced off the prime rate, which is typically the Fed funds rate plus 3 percent. So prime is around 6.63 percent right now. Then the lender adds their margin. Luna: So a typical HELOC today could be prime plus 1.5 percent — call it north of 8 percent. But people who opened HELOCs in 2021 or early 2022 were getting teaser rates closer to 4 percent. Lucas: Yeah, that's the quiet eating part. Take a concrete example. Say a homeowner in early 2022 opened a $50,000 HELOC at 4 percent. Their monthly interest-only payment was about $167. Fast forward to today. That same HELOC, if it adjusted fully, is probably at 9 or 10 percent. The monthly payment jumps to $375 or even $417. Luna: That's more than double. And it's not a hypothetical — this is happening to millions of people right now. The Consumer Financial Protection Bureau reported last year that outstanding HELOC balances were around $340 billion. Lucas: Right, and a lot of those balances were originated in the low-rate era. The thing is, HELOCs have a draw period — typically 10 years — followed by a repayment period. During the draw period, you can borrow, repay, and borrow again. And your rate floats. So even if you haven't drawn on it recently, the rate on any outstanding balance is repricing. Luna: So the inflation that's been sticky — CPI is at 332.6, down a bit from its peak but still elevated — it's not just eating your grocery budget. It's also eating your home equity borrowing power. Lucas: Exactly. And here's a wrinkle that doesn't get enough attention: the timing of your draws matters enormously. If you drew the full $50,000 in 2022, the entire balance is repricing. But if you only drew $20,000 and left $30,000 available, the undrawn portion still has a rate commitment—it's just that you haven't triggered the interest yet. But the moment you draw, you're getting today's higher rate. Luna: So that emergency fund you thought you had in your HELOC — it's now a much more expensive emergency fund. Maybe you think twice before using it for a kitchen remodel or a new car. Lucas: Exactly. And this connects to something that was in the news yesterday. Headline on CNBC: 'Odds of Federal Reserve rate hike surge as oil prices rip higher.' We're seeing oil prices pushing up, which feeds into inflation expectations. The 10-year breakeven inflation rate is at 2.28 percent — basically flat, but if oil keeps climbing, that number could rise. And the Fed might be forced to hike again. Luna: Which would push HELOC rates even higher. So anyone sitting on a variable-rate HELOC right now is exposed to additional upside risk on their borrowing costs. It's not a comfortable position. Lucas: No, it's not. So what can someone do? One option is to convert your HELOC into a fixed-rate second mortgage. You lock in the rate on the outstanding balance, so you're not exposed to further Fed moves. The trade-off is you lose the flexibility of revolving credit. Luna: And you might face prepayment penalties or closing costs. But if you're carrying a balance and you're worried about rates going up, it's worth running the numbers. Lucas: Another option is to simply pay down the HELOC as fast as you can. If you have savings earning 4 percent in a high-yield account, but your HELOC costs 9 percent, you're losing 5 percent a year by not paying it off. That's a guaranteed return. Luna: Right, pay down high-cost debt before you think about investing. That's personal finance 101, but so many people forget it when they see a home equity line as 'cheap' money. Lucas: And then there's the behavioral piece. If you have a HELOC and you haven't drawn on it, consider whether you really need it. That available credit might feel like a safety net, but it's a net that costs money every month in the form of commitment fees or just the opportunity cost. Some lenders charge an annual fee just to keep the line open. Luna: So maybe you close it and free up that mental and financial bandwidth. Or you keep it but only as a true last resort. Lucas: Exactly. And speaking of bandwidth, I want to mention something briefly. We keep this show ad-free, and that's deliberate. We want to talk about money without selling you anything. But the show costs money to produce — hosting, research, transcription, all of it. Luna: Yeah, and we've heard from listeners that they appreciate not having to skip through sponsored segments. It keeps the conversation clean. Lucas: So if this show has helped you think about your own finances differently — maybe you checked your HELOC rate after this episode, or you reconsidered a big purchase — a couple of dollars a month at buy me a coffee dot com slash fexingo genuinely makes a difference. It's what keeps the episodes coming without any ad interruptions. Luna: It's a small thing, but it adds up. And we're grateful for every bit of support. Lucas: Alright, back to the HELOC. One more thing I think is important: don't use a HELOC to finance consumption. I know that sounds obvious, but during the low-rate years, a lot of people treated their home equity like a credit card. They'd take a draw to go on vacation, buy furniture, cover a wedding. Those are all expenses that don't generate a return. Luna: And then inflation keeps eating away at your ability to repay because the dollars you're paying back are worth less, but the interest rate is higher. It's a double whammy. Lucas: Exactly. The better use of a HELOC is for things that increase the value of your asset or your earning potential — like a home renovation that adds equity, or investing in a business, or paying for education. Even then, you need to be realistic about the returns. Luna: So the big takeaway: check your HELOC statement. See what rate you're actually paying. Compare it to what a fixed-rate second mortgage would cost. And if you have a balance, prioritize paying it down. Lucas: That's the kind of concrete step that actually protects your purchasing power. Inflation is quiet, but your response doesn't have to be.