Why More Homeowners Are Considering Home Equity Loans Despite Higher Rates

An image of a person working on a home is used to illustrate an article about home equity loan rates. Credit: Getty Images
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Key Takeaways

  • The average rate for a $30,000 HELOC was 7.63%, surging more than 30 basis points week-over-week
  • The Federal Reserve raised its benchmark interest rate by half a percentage point in December. That could push rates higher for home equity loans and HELOCs.
  • A recent survey found 21% of respondents are considering tapping into their home’s equity in 2023.

As we close out the year, many homeowners are making plans to borrow with a home equity loan or line of credit (HELOC) in 2023. 

Demand for home equity loans and HELOCs has been strong in recent months. Inflation and volatility in the mortgage market have led many homeowners to use these tools to tap their home’s equity rather than a cash-out refinance

More homeowners are indicating interest in home equity loans, with 21% saying they’re likely to take one out in the next year, compared to 8% a year ago, according to a recent survey by MeridianLink, a software provider for financial institutions. 

“This can be valuable for first-time homeowners to finance renovations, or older homeowners to secure their golden years,” says Chris Maloof, president, Go-To Market at MeridianLink.   

As the Federal Reserve continues to battle inflation by hiking its target rate, it’s gotten more expensive to borrow with a home equity loan or HELOC. Experts predict home equity loans and HELOCs to remain popular among homeowners despite rising interest rates.

During its December meeting, the Fed hiked its benchmark short-term interest rate, the federal funds rate, by half a percentage point. As a result, interest rates for HELOCs, which closely track rate hikes from the Fed, jumped significantly

Here are the average home equity loan and HELOC rates as of Dec 21, 2022: 

Loan TypeThis Week’s RateLast Week’s RateDifference
$30,000 HELOC7.63%7.31%+0.32
10-year, $30,000 home equity loan7.90%7.93%-0.03
15-year, $30,000 home equity loan7.82%7.87%-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? 

Home equity loans and HELOCs allow you to access your home’s equity without changing your primary mortgage’s interest rate. When you borrow with a home equity loan or HELOC, you use the difference between your home’s value and what you owe on your mortgage as collateral. Since they are secured loans, you can often get a more competitive rate with a home equity loan or HELOC than with, say, a personal loan

Here’s how home equity loans and HELOCs work

With a home equity loan, you borrow a set amount of money and pay it back over time, typically at a fixed interest rate. That fixed interest rate means your monthly payment will be constant over the term of your loan. In a rising rate environment, it may be easier to factor a fixed payment into your budget. 

HELOCs, on the other hand, offer a revolving line of credit to tap as needed. You’ll only pay interest on the cash you’ve borrowed, but, usually, at a variable rate. That means your monthly payment is subject to change as rates rise. 

How Consumers Should Think About Home Equity in 2023

Home equity loans and HELOCs can be great financial tools. However, they do come with significant risk. If you default on payments, you could lose your home. 

If you’re planning on tapping into your home’s equity, it’s key to have a strategy for how you’ll use and pay back the money you borrow. Many experts say there’s potential for a recession in 2023. So, you want to make sure you have room in your budget in case you face job or income loss

Keep an Eye on Rates

With the Fed expected to hike rates further in 2023, keep an eye on interest rate movement. This is particularly important if you borrow with a HELOC as your monthly payments will change in concert with interest rates. 

“While no one can predict the future, guidance from the Federal Reserve indicates that interest rates may continue to rise.” Maloof says. “Home equity loans provide a good opportunity for homeowners to access the equity in their home for financing needs without impacting the rate on their primary mortgage.”

If you’re concerned about rate volatility, it may be a good idea to consider borrowing with a home equity loan instead.

Pro Tip

Before borrowing with a home equity loan or HELOC, make sure to shop around for lenders to see who can offer the most competitive rate.

How to Use Home Equity Financing

There’s a lot of flexibility when it comes to utilizing your home equity, but the most common uses are home improvement projects and debt consolidation

Experts caution against treating home equity loans, and particularly HELOCs, like an ATM or credit card. Remember, if you default on your payments, you risk losing your home. 

When borrowed intentionally, a home equity loan or HELOC can be a great financial tool to help you achieve your goals in 2023.