- The average rate for a HELOC dropped by 63 basis points to 7.30% this week.
- Rates are generally rising, and this big weekly decline is likely due to lenders offering low-interest introductory rates.
- Interest rates are expected to climb again after the Federal Reserve raises its benchmark rate next week.
The average interest rate for a home equity line of credit dropped significantly this week, but experts say that likely has more to do with lenders offering deals than with changes to the economic picture.
HELOC rates are generally based on two different components: a variable rate based on an index, like the prime rate, and a margin determined by the lender. The variable component moves up and down based on the rate environment, usually whatever the Federal Reserve does, while the margin is usually fixed.
To get borrowers in the door, however, a bank could offer an introductory deal: A certain low interest rate for the first six months or so. When a large lender does that, it can show up in national surveys like the one we use that comes from Bankrate, which shares a parent company with NextAdvisor.
The average rate for a $30,000 HELOC was 7.30% this week, a drop of 63 basis points from last week’s rate. Meanwhile, the prime rate didn’t change – it tracks the Fed’s federal funds rate, which has been moving up this year and is expected to climb again next week. That means the drop came from lenders putting HELOCs on sale.
“You see this all the time,” says Vikram Gupta, executive vice president and head of home equity at PNC Bank. “It’s to drive additional volume. Seasonally this is a very slow time of the year, so that’s when you run your discounts.”
After a promotional period ends, the rate will revert to the base rate – the prime rate plus a margin. That margin is determined by a variety of factors, including the size of the line of credit (bigger lines come with smaller margins, like buying in bulk) and the credit risk of the borrower, Gupta says.
Here are the average home equity loan and HELOC rates as of Dec. 7, 2022:
|Loan Type||This Week’s Rate||Last Week’s Rate||Difference|
|$30,000 HELOC||7.30%||7.93%||– 0.63|
|10-year, $30,000 home equity loan||7.91%||7.96%||– 0.05|
|15-year, $30,000 home equity loan||7.86%||7.91%||– 0.05|
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.
How Do Home Equity Loans and HELOCs Work?
With a home equity loan or HELOC, the difference between what your home is worth and what you owe on your mortgage is used as collateral to borrow money. A secured loan like these products is typically available at a better rate than a comparable unsecured one, like a personal loan. The downside is that if you fail to pay the money back, the lender can foreclose on your home.
Home equity loan: You take out a set amount of cash all at once and, typically, pay it back at a fixed interest rate. With a fixed balance and interest rate, you’ll know exactly what your monthly payment will be every single month, making it easier to budget. That might be appealing given the current rising rate environment.
HELOC: This functions more like a credit card. You have a revolving line of credit from the lender, and you can borrow up to that maximum amount during a draw period, often 10 years. After that period, you’ll have a certain amount of time to pay the money back, and you’ll only pay interest on what you’ve borrowed. HELOCs tend to have variable interest rates that change with the market, meaning your payment could be unpredictable.
What the Federal Reserve Means for HELOCs and Home Equity Loans
The next changes for home equity rates will depend largely on two events next week: new inflation data on Tuesday and the Federal Reserve’s rate hike on Wednesday.
The most recent Consumer Price Index was up 7.1% year-over-year in November, cooler than expected. That will help determine what’s next for interest rates and the broader economy as price increases show signs of slowing down.
On Wednesday, the Federal Reserve will announce its next rate hike. Experts expect the central bank to raise its benchmark short-term rate, the federal funds rate, by half a percentage point. That comes after four consecutive increases by three-quarters of a percentage point this year. The slowdown comes as the Fed gets closer to the level they expect is needed to bring inflation down.
While the federal funds rate is a short-term rate that affects what banks charge each other to borrow money, it does have some direct effects on consumers. For home equity loans, increases in what it costs for a bank to borrow will lead to higher rates being passed along to homeowners. The effect on HELOCs is more direct – many have variable rates tied to the prime rate, which directly tracks the federal funds rate.
“The market’s baking it into their expectations. I don’t expect much of a surprise. It’s going up. They’re raising rates,” Gupta says. “Whether it’s 50 or 75 [basis points], I don’t think it necessarily matters.”
The Economy’s Uncertain Future Affects Borrowers
The Fed’s rate increases are intentionally slowing the economy to try to stem the tide of inflation. But the economy is big and unwieldy, and the Fed might miss the target of a “soft landing” and push the country into a recession. Many homeowners have a sizable cushion of equity thanks to big increases in home prices the past few years, but that could change.
“In today’s current market, the labor market remains strong and homeowners are sitting on near record levels of equity,” says Odeta Kushi, deputy chief economist at First American Financial Corporation. “So even if you do lose your job, you still have the ability to sell your home, and not to the bank.”
Consumers should try to enter the new year ready for potential rough seas, Gupta says.
“I would encourage borrowers to use this holiday period to examine their finances and batten down the hatches for a financial storm, and hopefully it’s a mild one,” he says. “If it’s a mild one, no harm no foul.”
Be careful when borrowing against your home equity to cover necessities. You’ll have another bill to pay, and if you fail to pay back a home equity loan or HELOC, you could lose your home.
What You Should Know About Home Equity Loans and HELOCs
Home equity loans and HELOCs are secured loans, meaning if you don’t pay them back, the bank could foreclose on your home. That means they often come with more favorable interest rates and terms, but that’s because you’re carrying extra risk.
A popular use for home equity products is to pay for home improvements. The advantage there is that many home improvements will also raise the value of your house – increasing your equity even as you borrow against it.
Many people also use home equity loans and HELOCs for debt consolidation, but experts advise you to be wary: It can get you a lower interest rate than for credit card debt, but you now have the added risk of potentially losing your home if you don’t pay it back. That’s why the most important part of addressing any debt consolidation plan is to deal with the behaviors that got you into debt in the first place. If you don’t, you’ll just end up in a bigger hole.
With the economy shifting from a boom to a possible recession, the reasons people tap their home equity are changing, Gupta says. Experts expect fewer people to borrow against their homes for discretionary purposes and more to do so for necessities. Borrowing for necessities can be risky.
“That’s the type of home equity usage that always concerns people because we want to make sure they’ll be able to pay their bills,” Gupta says. “They’re using their home equity to pay for other bills but where’s the money to come from to pay their home equity bills?”