Why HELOCs Are More Expensive Despite Cooling Inflation

An image of a person fixing a kitchen sink is used to illustrate an article about home equity rates. Credit: Getty Images
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Key Takeaways

  • The average rate for a HELOC is 7.70%, jumping 38 basis points week-over-week.
  • Rates for home equity loans were unchanged week-over-week.
  • Inflation dropped to 7.7% year-over-year in October, a cooler number than expected. This doesn’t mean the Federal Reserve is going to stop raising rates altogether, but they may adopt a less aggressive approach in the coming months.

On the heels of the Federal Reserve’s November meeting, rates for home equity lines of credit (HELOCs) jumped last week while the rates for home equity loans stayed flat. 

It’s gotten more expensive to borrow with a home equity loan or HELOC this year as the Fed continues to battle inflation. They do this by jacking up their benchmark short-term interest rate, the federal funds rate – which affects the cost of home equity loans and HELOCs. 

Inflation was 7.7% year-over-year in October, according to the Consumer Price Index, a lower figure than expected. That could mean the effects of the Fed’s rate hikes are starting to take hold. 

“This is certainly welcome news. But it’s difficult to say that it’ll be convincing for the Fed policy makers quite yet,” says Jeffrey Roach, chief economist at LPL Financial, a national broker-dealer . “It’s certainly going in the right direction, deceleration in price growth, but it’s still growing.”

We’re not out of the woods yet, though, as 7.7% is still well above the Fed’s target of 2%. At their November meeting, the Fed announced a rate hike of 75 basis points, and promised additional increases going forward. 

“We’re not talking about declining prices, so we do expect rates to rise through the rest of this year as well as the first quarter of next year,” Roach says.  

Interest rates for home equity loans and HELOCs are predicted to stay elevated well into 2023. That’s not the best news if you’re looking to tap into your home’s equity. 

The bright side? Consumers have a lot of equity. The average mortgage holder still has $92,000 more equity than in February 2020. While it’s increasingly expensive to borrow with any loan, equity-rich homeowners still have some incentive to do so. 

The average rate for a $30,000 HELOC was 7.70%, ticking up 38 basis points from the week previous. 

Here are the average home equity loan and HELOC rates as of Nov. 9, 2022: 

Loan TypeThis Week’s RateLast Week’s RateDifference
$30,000 HELOC7.70%7.32%+ 0.38
10-year, $30,000 home equity loan7.57%7.57%none
15-year, $30,000 home equity loan7.49%7.49%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 Are Home Equity Loans and HELOCs? 

Home equity loans and HELOCs can offer more competitive interest rates than personal loans or credit cards. That’s because they’re secured loans, meaning you use the difference between what your home is worth and what you owe on your mortgage as collateral. 

Here’s a breakdown of how the two products work: 

Home equity loans, like personal loans, afford you a one-time lump sum of cash. Although there are some exceptions, most home equity loans are offered at a fixed interest rate. If and when rates increase, your monthly payment won’t be affected. 

HELOCs, on the other hand, function a lot like credit cards. When you borrow with a HELOC, you are provided with a revolving line of credit. During the draw period, you sometimes only pay interest on what you’ve borrowed. After that period, you make payments against the interest as well as the amount of credit you’ve used. HELOCs typically have variable interest rates, which means your monthly payment is subject to change as interest rates fluctuate. 

What’s Happening with HELOCs and Home Equity Loans

The housing market is seeing a drop in demand, which means homeowners can expect their home’s value to dip. However, equity positions remain strong when compared to previous years.

“I don’t know if people will have that much appetite to tap into home equity to fund particular projects, because rates will still creep higher,” Roach says. “I think we’re not at the end of this slope.” 

Homeowners are turning to home equity financing for several reasons. First off, mortgage rates have doubled since the start of 2022. Many homeowners are reluctant to give up their lower interest rate in a cash-out refinance just to tap their equity. Others want to carry out improvement projects to help their home sell in a cooling market

“Households are trying to navigate this world where prices are still elevated and wage growth hasn’t really kept up with inflation,” Roach says. “There’s a lot less discretionary funds to do renovations.” 

Shop Around for a HELOC or Home Equity Loan

While interest rates for home equity loans and HELOCs tend to be more competitive, they’re expected to go up as the Fed carries out additional rate hikes into 2023. 

However, you might get a rate that’s significantly different from the average depending on your financial situation. That’s why it’s a good idea to shop around for lenders to see who can offer you the best rate. 

Before committing to borrowing with a home equity loan or HELOC, ensure you can afford the carrying cost if rates go up dramatically. While a home equity loan provides security in that your monthly payment isn’t subject to fluctuations, a rising rate environment impacts your entire financial picture

Be sure to have a repayment plan that doesn’t put a strain on your budget. Establishing an adequate emergency fund is a great way to give yourself some extra breathing room. 

“I think if people can hold off on doing anything that would really increase their debt obligations, this is definitely the right time to reconsider spending behaviors,” Roach says. 

Another reason home equity financing is so attractive today? There are not a lot of hoops to jump through in order to get it. After shopping around for the right lender, you’ll fill out an application which will determine how much financing you’re eligible for. 

Keep in mind lenders may be tightening their qualification standards as rising interest rates make loans riskier. Improving your credit score and paying off any high-interest debts can improve your chances of getting approved. 

Pro Tip

In a rising rate environment, it’s important to shop around for lenders to see who can offer you the best rate.

Should You Tap Your Home Equity?

The most common uses of home equity loans and HELOCs are for home improvement projects and debt consolidation. But there’s a lot of flexibility when it comes to utilizing your home equity. 

“Folks often use home equity for large purchases, but perhaps, if it’s for a boat, maybe just wait,” Roach says. “By waiting, you may be on better footing in the long term.”

However, as long as you have a clear understanding of why you’re tapping into your home equity, as well as a comfortable repayment plan, the sky’s the limit. 

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

“One of America’s favorite pastimes is spending money,” Roach says. “In this environment, where borrowing costs are so elevated, it’s a great opportunity for people to retool, rethink, and rebalance their expectations and habits.”