Why Home Equity Loans are Booming as Refinance Demand Fades

An image of a person shopping at a home improvement store is used to illustrate a story about home equity loan rates. Credit: Getty Images
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Key Takeaways

  • The average interest rate for home equity loans and lines of credit (HELOCs) were basically flat this week.
  • Rates, especially for HELOCs, mostly move in response to moves by the Federal Reserve. The Fed’s next meeting is set for late September.
  • Home equity products have grown significantly in popularity as mortgage rates have surged this year, reducing demand for refinances

This year hasn’t been kind to the mortgage market, but it’s caused a resurgence for home equity loans and lines of credit (HELOCs).

That’s the takeaway from a report this week by the real estate data firm ATTOM, which found the number of mortgages issued in the second quarter of the year was down 13% from the first quarter and 40% from a year earlier.

Behind that drop was a significant increase in mortgage rates. The average 30-year fixed rate has shot up from around 3.3% at the start of the year to 5.84% this week, according to a survey by Bankrate, which like NextAdvisor is owned by Red Ventures. That’s led to a big drop in the number of refinances. You usually don’t want to refinance from a lower mortgage rate to a higher one, and it’s often not the best idea to do so if you want to tap your home equity in a cash-out refinance.

For homeowners interested in tapping that home equity, the home equity loan and HELOC have become the new products of choice, the report found. The number of HELOCs issued was up 35% from the first quarter of 2022 and 44% from the second quarter of 2021.

“Borrowers looking to tap into their equity should know that HELOC activity has been particularly strong among credit unions and community banks, along with a small but growing number of depository banks,” said Rick Sharga, executive vice president of market intelligence at ATTOM. “While non-bank mortgage lenders may begin to more aggressively originate home equity loans, it’s not likely they’ll be active participants in the HELOC market.”

The average interest rates for common home equity products were largely unchanged this week as they continue to remain relatively flat except when responding to rate hikes by the Federal Reserve. The Fed’s next meeting is set for late September. 

Here are the average rates as of Aug. 25, 2022: 

Loan TypeThis Week’s RateLast Week’s RateDifference
$30,000 HELOC6.52%6.51%0.02
10-year, $30,000 home equity loan7.05%7.05%none
15-year, $30,000 home equity loan6.99%6.99%none

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 the Difference Between a Home Equity Loan and a HELOC?

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 wealth as collateral to borrow money. Here’s the difference between these two products:

Home equity loans entail borrowing a lump sum of cash and paying it back in installments over a certain number of years, generally at a fixed interest rate. 

HELOCs are a little like credit cards, in that the bank gives you a limit of how much you can borrow at once and you pay interest only on what you actually borrowed. The interest rate tends to be variable, often based on a benchmark like the prime rate.

Experts expect interest rates for home equity loans and HELOCs to rise during the rest of 2022. The prime rate, which is the benchmark for many HELOCs, tends to track increases in short-term interest rates by the Federal Reserve. The Fed has so far raised its rate four times, most recently at the end of July, and is expected to keep doing so through the end of the year. For home equity loans, rates are also likely to keep climbing as banks’ borrowing costs rise, experts say. 

Homeowners Have a Lot of Equity

The dramatic rise in home prices the last couple of years means American homeowners have never had more equity to borrow against. ATTOM found that in the second quarter of 2022, nearly half of mortgaged residential properties were considered “equity-rich,” meaning mortgages and other home loans covered no more than half of their value. 

Black Knight, a mortgage technology and data firm, found American homeowners’ total tappable equity – what they could borrow against while still retaining 20% – hit a new record high of $11.5 trillion in the second quarter, but that growth has slowed as price growth has cooled. 

Homeowners who want to tap that equity are turning to home equity products because of the big  increases in mortgage rates this year, which have made cash-out refinances less appealing. Cash-out refis made more sense when mortgage rates were at record lows, but rates have risen more than two percentage points since the start of the year, and it doesn’t make much sense to take a significantly worse rate on your mortgage just to get some cash.

Pro Tip

When deciding between a home equity loan or line of credit and a cash-out refinance, consider not just the interest rates of the products, but how much your payment for your mortgage would go up with a cash-out refinance. It could be more expensive in the long run, even if the rate seems lower.

Home Equity Loans Come With Risks

Home equity loans and HELOCs are secured against your home, which means if you don’t pay them back, the bank can foreclose. Note that just because the value of your house has increased doesn’t mean it will stay there forever. Real estate values can drop, and are starting to fall a little bit. Your local market might even see prices fall while national averages increase. 

You shouldn’t use a home equity loan or HELOC for just anything. They’re most often used for home renovations, which can come with a big price tag but can simultaneously increase the value of your home. Experts caution against using them to finance a more expensive lifestyle or for debt consolidation.