- Home equity loan rates were virtually unchanged this week, dipping one basis point
- The average rate for a $30,000 home equity line of credit (HELOC) was flat at 5%
- Home equity rates will take a little longer to see the effects of Wednesday’s Fed rate hike, but HELOCs will have more immediate reaction.
- Home equity loans and HELOCs have become more popular because of rising mortgage rates and an increased demand for home renovations
- Experts warn about home equity lending risks, including foreclosure
Home equity loan and HELOC rates barely moved this week, despite the Federal Reserve’s announcement Wednesday that it would raise the target federal funds rate by 75 basis points.
The weekly average home equity loan rate is approaching 7% moving only 1 point from last week. The average HELOC remained unchanged from last week at 5%. But experts believe the lull in home equity lending rates is short-lived.
Home equity and HELOC rates are expected to see some ripple effects from Wednesday’s Federal Reserve action. “Another big interest rate hike by the Fed means higher rates for home equity borrowers are on the way,” says McBride.
Since HELOC rates are variable and follow the prime index, it’s expected to see those changes apply as soon as next week. “Variable-rate HELOCs will move higher in step with the Fed’s 0.75% move,” says Greg McBride, chief financial analyst at Bankrate.com. Home equity rates, however, take a little longer to see the effect, Mcbride says “typically within 90 days.”
The surge in mortgage rates this year has led to a resurgence of home equity loans and HELOCs, as higher mortgage rates cut the demand for cash-out refinances. Rising home equity from higher home prices are also contributing to the surge in home equity lending demand. “We’ve had increased values in real estate significantly over the last few years. So a lot of individuals may actually have more equity in their home, and if they want to tap that equity for whatever reason, they can pull that equity out of their home,” Mahesh Odhrani, CFP and president and founder of Las Vegas financial planners firm Strategic Wealth Design told NextAdvisor.
Property values were more than double the loan balances, such as a mortgage, in the first months of 2022. This makes nearly half of mortgaged residential properties in the U.S. “equity-rich,” according to the real estate data firm ATTOM.
With the growing popularity of remote work, people are spending more time at home — a pandemic side-effect — and looking for ways to fund a home remodel.
“This can be money that’s valuable for people, especially people who have owned their home for a long time,” Linda Sherry, director of national priorities for Consumer Action, a national advocacy group, told us. But she warns borrowers to be careful about taking out money for non-essentials. “If it’s not a need and it’s just some sort of desire or want, you should really ask yourself: Is this something that is wise?”
What Are Today’s Average Home Equity and HELOC Rates?
Here are the average home equity loan and line of credit (HELOC) rates this week, as of July 28,2022:
|This Week’s Rate
|Last Week’s Rate
|10-year, $30,000 home equity loan
|15-year, $30,000 home equity loan
How These Rates Are Calculated
These rates come from a survey conducted by Bankrate, which like NextAdvisor is owned by Red Ventures. The averages are determined from a survey of the top 10 banks in the top 10 U.S. markets.
What Are Home Equity Loans and HELOCs?
The difference between what your home is worth and what you owe on mortgages and other home loans is called equity. With a home equity loan or HELOC, you use that equity as collateral to get a loan, often to fund home improvement projects or other major expenses.
Home equity loans and HELOCs look different:
Home equity loans are similar to a fixed-rate mortgage, in which you borrow a certain amount of cash and pay it back over a set number of years at a certain interest rate.
HELOCs are more akin to credit cards, in that the bank gives you a maximum amount you can borrow at any one time during a draw period and you can take out some, pay it back, and borrow more until the draw period ends. You only have to pay interest on what you borrow. The interest rate tends to be variable, meaning it will change over time with an index like the prime rate published by the Wall Street Journal.
What Factors Affect Home Equity Loan and HELOC Rates?
Interest rates for home equity loans and HELOCs are expected to climb through the end of 2022. Many HELOCs base their variable rate on the prime rate, which tends to track increases in short-term interest rates by the Federal Reserve. To combat persistently high inflation, the Fed raised its benchmark interest rate by another 75 basis points this week. Home equity loans are set based on what it costs lenders to borrow money and offer the loans, and are also likely to keep climbing as those costs increase.
Consumers are turning more and more to home equity products due in part t
o the recent dramatic increases in mortgage rates, which have made cash-out refinances less attractive. Cash-out refis were popular in recent years as mortgage rates were at record lows and home prices increased, but mortgage rates have risen more than two percentage points since the start of the year, making consumers far less likely to want to take on a significantly worse mortgage rate just to get some cash.
What Borrowers Should Know About Home Equity Loans and HELOCs
Like a mortgage, home equity loans and HELOCs are secured against your home. That means if you don’t pay it back, the bank can foreclose on your house. Experts caution against using home equity loans for basic living expenses. Instead, focus on using them for big, one-time expenses like major home renovations that will provide you with more value in the future. HELOCs can be tempting because of how they operate like a credit card, but there are several things experts caution against using them for because of the possibility of borrowing more than you need.
If you understand the risks and know you can pay the money back, home equity loans and HELOCs can provide lower interest rates than other types of borrowing. Experts say it’s wise to be careful with any kind of borrowing, and do it only in situations where you’re confident you’ll have the cash in the future to repay. With HELOCs, experts suggest only taking out a line of credit as large as you could repay if you borrowed it all.
The growth in spending on home renovations is expected to slow down a bit going into next year, although it will likely remain high, according to a report by the Joint Center for Housing Studies of Harvard University. The slowing sales of homes, rising mortgage rates, calming home price growth are all likely to cool off the rise in home remodeling, the center said.
“While beginning to soften, growth in spending for home improvements and repairs is expected to remain well above the market’s historical average of 5%,” Abbe Will, associate project director of the Center’s Remodeling Futures Program, said in a statement. “In the first half of 2023, annual remodeling expenditures are still set to expand to nearly $450 billion.”
How Does the Housing Market Affect Home Equity?
A lot of homeowners have more equity in their homes now because of the big run-up in housing prices in the past two years. The median home listing price was $450,000 in June, an increase of 16.9% over last year and 38.5% compared to June 2019, according to Realtor.com data. Experts say higher mortgage rates have slowed the rate at which homes are selling, but that prices are unlikely to come down in any significant way nationwide.
Experts don’t expect a big housing market crash like 15 years ago, in part because homebuyers are generally much more able to pay for the houses they’re getting. “My expectation is that the market isn’t going to crash in any sense,” says Eileen Derks, senior vice president and head of mortgage at Laurel Road, an online lender owned by Keybank that specializes in serving health care professionals. “I say that because credit quality of folks today as opposed to back in 2008 is very different.”