The Federal Reserve raised rates by 0.25% on Sept. 16, bringing the federal funds target range to 3.75% to 4.00%.
For borrowers with variable-rate debt, that decision could have more of a direct impact will for a 30-year fixed mortgage.
But HELOCs and adjustable-rate mortgages respond differently, and neither necessarily changes the moment the Fed announces a hike.
How the Fed Affects ARM and HELOC Rates
| Feature |
HELOC |
Adjustable-Rate Mortgage |
| Typical rate structure |
Variable index + margin |
Initial fixed period, then index + margin |
| Common index |
Prime rate, depending on the loan |
SOFR or another index specified in the loan |
| Can a Fed hike affect the rate? |
Yes, often relatively quickly if the index rises |
Potentially, but only when the ARM reaches an adjustment date |
| Does the rate automatically rise 0.25%? |
No. It depends on the index and loan terms. |
No. It depends on the index, margin, reset date and caps. |
What The Fed Rate Hike Means For HELOC Rates
A variable-rate HELOC is one of the borrowing products that can feel a Fed rate increase relatively quickly.
A variable HELOC rate generally has two components: an index and a margin.
The index changes with broader interest-rate conditions. The margin is an additional percentage set by the lender. Together, they determine the interest rate charged on the line of credit.
Many HELOCs use the U.S. prime rate as their index. Banks set the prime rate themselves, but it tends to move closely with changes in the federal funds rate.
That creates a much more direct connection between Fed policy and HELOC rates than exists with 30-year fixed mortgages.
Does A 0.25% Fed Hike Mean Your HELOC Rate Rises 0.25%?
Not automatically.
If your HELOC uses an index that rises by 0.25% after the Fed decision, your HELOC rate could also rise by 0.25% if the lender margin remains unchanged and no other contractual provision limits the adjustment.
But the exact impact depends on the index named in your agreement, when that index is measured, how often your rate adjusts and whether your loan includes a maximum or minimum rate.
A HELOC tied to a different index may respond differently.
When Would A Higher HELOC Rate Affect Your Payment?
The timing depends on your loan agreement.
A variable HELOC can recalculate its rate according to the adjustment schedule specified in the contract. If your index increases, the higher rate can affect the interest charged on your outstanding balance once that adjustment takes effect.
The effect on your monthly payment also depends on your balance and how payments are calculated during the draw or repayment period.
If part of your HELOC balance has been converted to a fixed-rate option, that portion may work differently from the variable balance.
What The Fed Rate Hike Means For Adjustable-Rate Mortgages
An adjustable-rate mortgage has a less immediate relationship with a Fed rate hike.
ARMs usually begin with an initial period in which the mortgage rate is fixed. Once that period ends, the rate can adjust according to a schedule established in the mortgage documents.
For example, a 5/6 ARM generally has a fixed rate for its first five years and can then adjust every six months.
If you're still within that initial fixed period, the Sept. 16 Fed hike does not change your existing mortgage rate.
How Is An ARM Rate Calculated?
The CFPB explains that an ARM's adjusted rate is generally based on two components:
ARM rate = index + margin, subject to the loan's rate caps
The index changes with financial markets. The margin is established by the lender and generally remains fixed after closing.
For many conventional ARMs, the index is tied to the Secured Overnight Financing Rate, or SOFR. Fannie Mae and Freddie Mac use a 30-day average of SOFR for eligible SOFR-indexed ARM products.
The 30-day average SOFR was about 3.65% on Sept. 16. Because that measure averages rates over the preceding 30 days, it does not immediately jump by the full amount of a single Fed rate increase.
Why An ARM Doesn't Reset On Fed Day
Three things separate a Fed announcement from the rate you actually pay on an ARM.
First, your mortgage has a scheduled adjustment date. The rate does not change between those dates simply because the Fed acts.
Second, the lender uses the index specified in your loan documents. A Fed hike can influence short-term market rates such as SOFR, but the federal funds rate itself may not be your ARM index.
Third, ARM rate caps can limit how much the interest rate changes when an adjustment occurs.
The CFPB identifies initial, subsequent and lifetime adjustment caps as common ARM features. Your mortgage documents specify the caps that apply to your loan.
What If Your ARM Is About To Reset?
If your adjustment date is approaching, the Fed hike could matter indirectly because it can influence the short-term interest-rate indexes used to calculate ARM rates.
But you need to know your specific index before estimating the effect.
Look at your mortgage documents or adjustment notice for:
- The index used by your ARM
- Your lender margin
- Your next adjustment date
- The date used to measure the index
- Your initial, periodic and lifetime rate caps
Your fully indexed rate is generally the applicable index plus the margin, subject to those limits.
An ARM approaching its first adjustment could therefore move by more or less than the Fed's 0.25 percentage-point increase.
What If You're Shopping For A New ARM?
The Fed's rate increase can also influence pricing on newly originated ARMs, but lenders do not simply add 0.25 percentage points to new ARM rates after a Fed meeting.
New ARM pricing reflects the relevant interest-rate index, expectations for future rates, lender pricing and the characteristics of the borrower and loan.
When comparing an adjustable-rate mortgage with a fixed-rate mortgage, the initial rate is only one part of the comparison.
The index, margin, length of the fixed period, frequency of later adjustments and rate caps determine what the loan could cost after the introductory period ends.
Which Is More Directly Affected: A HELOC Or An ARM?
A variable-rate HELOC will generally have the more immediate connection to a Fed rate hike.
If the HELOC is indexed to prime and prime moves after the Fed's decision, the rate on the line of credit can follow according to the loan's adjustment terms.
An ARM has another layer of separation. Even if its underlying index rises, the mortgage rate generally does not change until its scheduled adjustment date. The index measurement rules and rate caps can further affect the size of the adjustment.
That means two borrowers can experience the same Fed hike very differently. A homeowner with a variable-rate HELOC could see borrowing costs rise relatively quickly, while someone in year three of a five-year fixed ARM period may see no immediate change at all.
What Should HELOC Borrowers Check Now?
If you have a HELOC, check your agreement or most recent statement for the index, lender margin and adjustment frequency.
Those terms tell you whether the Fed hike is likely to reach your rate and when any change could take effect.
If your HELOC offers a fixed-rate conversion feature, check whether an existing fixed portion is treated separately from the variable balance.
What Should ARM Borrowers Check Now?
If you have an ARM, the first question is whether you're still in the initial fixed-rate period.
If so, the Fed hike does not change your current rate.
If your ARM is already adjusting, check the index, margin, next reset date and rate caps. Those factors determine what happens to your rate, not the size of the Fed's latest move by itself.
The Bottom Line
The Fed's Sept. 16 rate increase matters more directly for HELOCs and ARMs than it does for fixed-rate mortgages, but the effect is not the same for both products.
Variable-rate HELOCs can react relatively quickly, particularly when they use the prime rate as an index. If the index rises, the HELOC rate can rise with it according to the terms of the loan.
ARMs move on their own schedules. A Fed hike can influence the index used to calculate a future adjustment, but an existing ARM generally does not change until its scheduled reset date. The margin and rate caps also affect the final rate.
For either product, the most useful information is in the loan documents: the index, margin, adjustment schedule and any applicable caps.
Frequently Asked Questions
Will My HELOC Rate Go Up After The Fed Hike?
It may. Many HELOCs have variable rates based on an index such as the prime rate plus a lender margin. If your index rises, your HELOC rate may rise according to the adjustment terms in your agreement.
Will My ARM Rate Go Up After The Fed Hike?
Not necessarily, and usually not immediately. Your ARM changes only on scheduled adjustment dates after any initial fixed-rate period. The new rate depends on your loan's index, margin and rate caps.
Does The Fed Set The Prime Rate?
No. Banks set their prime rates. However, the prime rate tends to move closely with changes in the federal funds rate, which is why Fed decisions can have a relatively direct effect on prime-indexed HELOCs.
Does The Fed Set SOFR?
No. SOFR is a market-based overnight financing rate calculated from transactions in the Treasury repurchase market. The New York Fed publishes SOFR and related averages. Fed policy can influence short-term market rates, but SOFR is not the federal funds rate.
What Determines My ARM Rate After It Adjusts?
Your adjusted ARM rate is generally based on the index specified in your mortgage plus the lender margin, subject to the rate caps in your loan documents.
What Should I Check After A Fed Rate Hike?
For a HELOC, check the index, margin and adjustment frequency. For an ARM, check whether you're still in the fixed period, your next adjustment date, the index and margin, and the initial, periodic and lifetime rate caps that apply to your loan.
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