HELOCs Are Getting More Expensive. Why They’re Gaining Popularity Anyway

An image of a person working on a home is used to illustrate an article about home equity loan rates Credit: Getty Images
We want to help you make more informed decisions. Some links on this page — clearly marked — may take you to a partner website and may result in us earning a referral commission. For more information, see How We Make Money.

Key Takeaways

  • The average rate for a home equity loan ticked up 7 basis points week-over-week.
  • Experts predict the Federal Reserve will announce a 50 basis point rate hike during its December meeting. Borrowing with a home equity loan or HELOC will be more expensive as a result.
  • Demand for HELOCs is rising, and Generation Z and millennial homeowners are driving that trend, a recent survey found.

Tapping into your home’s equity is getting more expensive, but it’s gaining traction with younger homeowners thanks to a big increase in home values. 

Mortgage rates stayed below 7% this week while interest rates for home equity loans and lines of credit inched closer to 8%. The average rate for a $30,000 HELOC stayed put at 7.93%, but home equity loan interest rates crept up by seven basis points week-over-week. 

Despite rising rates, a recent report from Citizens Bank found over half of surveyed millennial and Generation Z homeowners were likely to consider applying for a HELOC in the next three years. 

“It seems like a surprising finding but what we’ve seen recently is that the increase in home values has created an opportunity for younger homeowners who haven’t historically qualified for a HELOC,” says Adam Boyd, head of home equity lending at Citizens Bank. “Those generations are getting to a point where home equity financing is an attractive option for them.”

Throughout 2022, demand for home equity loans and HELOCs has been strong. Inflationary pressures and volatility in the mortgage market have spurred many homeowners to leverage their home’s equity. 

While experts have noted a slight slowdown in demand for home equity financing as rates inched up, “This will be the first year in more than a decade where, industry wide, we’re seeing growth in home equity demand,” Boyd says. 

Here are the average home equity loan and HELOC rates as of Nov. 30, 2022: 

Loan TypeThis Week’s RateLast Week’s RateDifference
$30,000 HELOC7.93%7.93%none
10-year, $30,000 home equity loan7.96%7.89%+ 0.07
15-year, $30,000 home equity loan7.91%7.84%+ 0.07

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? 

When borrowing money with a home equity loan or HELOC, you use the difference between what your home is worth and what you owe on your mortgage as collateral. 

Since home equity loans and HELOCs are secured loans, you can typically get a more competitive rate than you would with, say, an unsecured personal loan. The con? You run the risk of losing your home if you default on payments. 

Here’s how the two products work

With a home equity loan, you’re afforded a one-time lump sum of cash that you’ll pay back over a set period. Because home equity loans tend to have fixed interest rates, your monthly payment won’t change dramatically. In a rising rate environment, this security may be especially attractive to borrowers. 

A HELOC allows you to access your home’s equity through a revolving line of credit. There’s a limit to how much you can take out at once but you will only pay interest on the money you’ve actually used. However, HELOCs typically have variable interest rates. This means your monthly payment is subject to change as rates move, and experts predict they will. 

What the Federal Reserve Means for Home Equity Loans and HELOCs

To combat stubborn inflation, the Federal Reserve has hiked its benchmark short-term interest rate, the federal funds rate, by 3.75 percentage points since March. By making it more expensive to borrow money, the Fed hopes to trim consumer spending. 

Fed Chairman Jerome Powell said in a recent speech, “We need to raise interest rates to a level that is sufficiently restrictive to return inflation to 2%. There is considerable uncertainty about what rate will be sufficient, although there is no doubt we’ve made substantial progress.” 

The prime rate, which is the benchmark for many HELOCs, tracks increases in short-term interest rates by the Fed. In their December meeting, the Fed is poised to introduce another increase, likely 50 basis points. As a result, interest rates for home equity loans and HELOCs are expected to increase. 

“As the prime rate increases, we will see a rise in rates for home equity products, but I don’t expect them to move at the magnitude that they have already this year,” Boyd says. 

How to Get Home Equity Financing

To get a home equity loan or HELOC, you’ll fill out an application with a lender of your choosing. It doesn’t need to be the same lender through which you have your mortgage, though it may be convenient to do so. Experts recommend shopping around to see who offers the best rate. 

Remember, the average rate may not be the rate you qualify for. Depending on your financial situation, your lender may offer a rate that’s higher or lower than the average. 

If you have the time, consider getting pre-qualified for home equity financing to get a better idea of your loan’s potential carrying costs. Experts stress the importance of being able to comfortably make your monthly payments without stretching your budget. 

How to Use A Home Equity Loan or HELOC

You can use the money you borrow against your home for many different purposes. The most common uses, though, are home improvement projects and debt consolidation.

When used for home renovations or improvement projects, a home equity loan or HELOC can help you increase the value of your home. In a housing market where home sales are down year-over-year, a kitchen or bathroom remodel can improve your home’s resale value in the future. 

Home equity loans and HELOCs can be excellent financial tools, but experts caution against tapping into your home’s equity simply because you can. Make sure you have a clear purpose as well as a comfortable repayment plan. 

“You don’t want to use your home as collateral if you’re in an uncertain financial situation,” Boyd says. “You’re potentially putting not just one of your greatest assets at risk, but also, your home. That’s the biggest risk and should be the biggest consideration for borrowers.”