- Home equity loan rates were virtually unchanged this week, rising only slightly toward 7%
- The average rate for a $30,000 home equity line of credit (HELOC) was essentially flat at 5%
- Home equity loans and HELOCs have gained popularity because of rising mortgage rates and an increase in the popularity of home renovations.
- Experts say homeowners should be careful what they use home equity products for because of the risk of losing your home if you default.
Rates are expected to see some effects from action next week by the Federal Reserve. The central bank is expected to raise its benchmark short-term interest rate, likely by 75 basis points, to combat persistently high inflation. That will directly affect HELOCs with a variable rate that tracks an index, like the prime rate, which follows those changes. It will also raise the cost of borrowing for banks, pushing up rates for home equity loans.
Despite those rising rates, the surge in mortgage rates this year has led to a resurgence of home equity loans and HELOCs, as higher mortgage rates cut the demand for cash-out refinances. Also behind the surge is the increasing popularity of home remodeling, pushed by pandemic-driven remote work and rising home equity from higher home prices.
The growth in spending on home renovations is expected to slow down a bit going into next year, although it will likely remain high, according to a report by the Joint Center for Housing Studies of Harvard University. The slowing sales of homes, rising mortgage rates, calming home price growth are all likely to cool off the rise in home remodeling, the center said.
“While beginning to soften, growth in spending for home improvements and repairs is expected to remain well above the market’s historical average of 5%,” Abbe Will, associate project director of the Center’s Remodeling Futures Program, said in a statement. “In the first half of 2023, annual remodeling expenditures are still set to expand to nearly $450 billion.”
Here are the average HELOC and home equity rates as of July 21, 2022:
|Loan Type||This Week’s Rate||Last Week’s Rate||Difference|
|10-year, $30,000 home equity loan||6.91%||6.88%||0.03|
|15-year, $30,000 home equity loan||6.92%||6.90%||0.02|
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 Home Equity Loans and HELOCs?
The difference between what your house is worth and what you owe on mortgages and other home loans is called equity. When you get a home equity loan or HELOC, you use that equity as collateral to borrow money, typically to fund home improvement projects or other major expenses.
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. They’re typically one of the cheaper forms of credit, and give you a large amount of cash with predictable payments.
HELOCs function a bit more like credit cards, in that the bank gives you a maximum amount you can borrow at once during a draw period and you can borrow some, pay it back, and borrow more until the draw period ends. You only pay interest on what you borrow. The rate is usually variable, meaning it will change over time with what the going rate is, generally based on a benchmark like the prime rate published by the Wall Street Journal.
What’s Changing About Home Equity Loan and HELOC Rates?
Experts expect home equity loans and HELOCs to keep rising through the end of the year. A lot of HELOCs have variable rates based on the prime rate, which tracks changes the Federal Reserve makes to its short-term interest rate. The Fed is expected to keep raising its benchmark rate to combat high inflation, which was 9.1% year-over-year in June, according to the Consumer Price Index. Fed officials have signaled they will likely raise their benchmark rate by 75 basis points at the end of July. For home equity loans, rates are set based on the lender’s cost to borrow money, which is also affected by Fed changes, among other factors.
Home equity products have gained popularity in part due to the recent dramatic increases in mortgage rates, which have made cash-out refinances less attractive. Cash-out refis were popular when 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 borrow some cash.
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. “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.
Home equity products cost less than most other loan products, but aren’t the best choice for everything. HELOCs, for example, are particularly good for home renovation projects, but you likely don’t want to take on the risk involved to get cash for a vacation or to invest in the stock market.
Home equity loans and HELOCs aren’t the best choice for every use. They may be good for home improvements, but you may want to avoid taking one out just to go on vacation, experts say.
What Does the State of the Housing Market Mean for Home Equity?
Homeowners who have lived in their homes for more than a year or so likely have a lot more equity 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, up 38.5% compared to June 2019, according to Realtor.com.
Higher mortgage rates have slowed down the pace of home sales, but experts tell us prices are unlikely to come down significantly nationwide because of a mismatch between the supply of available homes and demand for them.