After a dramatic month of rate movement and economic news, home equity loan and line of credit (HELOC) rates closed June on a quiet note.
Mortgage rates were calm this week as well, even dropping a bit, as markets cooled off from a dramatic increase earlier in the month after a report of continued high inflation led to a 75-basis-point rate hike by the Federal Reserve. After that move, interest rates for home equity loan products rose.
“It’s the same sort of dynamics in terms of banks’ situations,” says Rob Cook, vice president for marketing, digital, and analytics for Discover Home Loans. “Their borrowing costs have gone up.”
Rates have cooled since then, as markets keep an eye on fears of a recession and react to the big action taken by the Fed, Cook says.
For homeowners with HELOCs that have variable interest rates, the Fed’s move translates more directly into likely increases ahead. Those often track the prime rate, an index that follows the Fed’s changes, meaning they’ll see their rates go up, Cook says.
As rising rates eat into the benefits of cash-out refinancing, homeowners interested in tapping into their home equity instead should consider more than just the interest rate, Cook says. Home equity loans and HELOCs can often come with fees, including origination fees when you first get a loan and, in the case of some HELOCs, annual fees. “It requires a lot of research on the part of borrowers, and I encourage anyone considering a loan option to do the homework,” he says.
Here are the average rates as of June 29, 2022:
|Loan Type||This Week’s Rate||Last Week’s Rate||Difference|
|10-year, $30,000 home equity loan||6.83%||6.83%||0.00|
|15-year, $30,000 home equity loan||6.83%||6.83%||0.00|
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’s Going On With 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 published by The Wall Street Journal, which often tracks changes in short-term interest rates by the Federal Reserve. The Fed is expected to keep raising its benchmark rate to combat high inflation. For home equity loans, rates are set more like mortgage rates, and are also likely to keep climbing as banks’ borrowing costs increase.
“The prime [rate] will track with those rate increases that the Fed issues,” Mark Hinshaw, co-founder and president of Candor Technology, a mortgage technology firm, told us. “The same will happen to the bank’s cost of capital ultimately.”
Consumers are turning more to home equity products due in part to 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. “One of the main purposes is as a bit of a cash-out refinance alternative,” says Vikram Gupta, head of home equity at PNC Bank.
What Are Home Equity Loans and HELOCs?
When your home’s value is more than what you owe on mortgages and other home loans, that difference is called equity. With a home equity loan or HELOC, you use the equity as collateral to borrow money, often to fund home improvement projects or other major expenses.
Home equity loans and HELOCs can be a good way to borrow money for big expenses, but be careful not to borrow more than you can pay back.
Home equity loans and HELOCs work differently:
Home equity loans function similarly to a fixed-rate mortgage, in which you borrow a lump sum of cash up front and pay it back in installments over a set number of years at a set interest rate.
HELOCs are more like credit cards, in that the bank gives you a maximum amount you can borrow at once during a draw period — a line of credit — and you can take out some, pay it back, and borrow more until the draw period ends. You’ll pay interest only on what you borrow. The interest rate is usually variable, meaning it will change over time with what the going rate is, usually based on a benchmark like the prime rate published by the Wall Street Journal.
What Risks Come With 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 take your house. Be careful when you borrow. “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?” Linda Sherry, director of national priorities for Consumer Action, a national advocacy group, told us.
Consumers should be careful with how they borrow money, Hinshaw says. “If they’re not confident in their ability to generate cash flows going forward, they should hold off on that,” he says. “It doesn’t make sense to be over-leveraged.”
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.
How Does the Housing Market Affect My 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 down the rate at which homes are selling, but that prices are unlikely to come down in any significant way nationwide.
What that means for homeowners is that your home is worth a lot more than it was two or three years ago, and that you didn’t have to do anything to earn that added equity. That gives you more flexibility to take out loans or lines of credit against your home equity, if you understand the risks.