Why Interest Rates for Home Equity Loans and HELOCs Are on the Rise Despite Signs of Cooling Inflation

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KEY TAKEAWAYS

  • Interest rates for home equity loans ticked up more than 30 basis points week-over-week
  • Homeowners still have high levels of tappable equity despite home price growth slowing down nationwide
  • The Federal Reserve is expected to slow the pace of rate hikes but not stop them entirely. As a result, borrowing with a home equity loan or HELOC will be more expensive in 2023

Interest rates for home equity loans and lines of credit (HELOCs) are up despite a recent dip in mortgage rates. 

After inflation came in cooler than expected year-over-year in October, mortgage rates have been trending downwards, as lenders are beginning to bake in expectations that the Federal Reserve will slow its rate hikes in the months ahead. This isn’t the case for home equity loans and HELOCs, which have been steadily increasing since the Federal Reserve’s November meeting. 

Unlike traditional mortgage rates, certain home equity products, particularly HELOCs, are directly tied to what the Fed does. Despite softer inflation data, interest rates for home equity loans and HELOCs will continue to move in concert with any hikes to the Fed’s benchmark short-term interest rate, the Fed funds rate. 

Home price growth is starting to moderate nationwide, but there would have to be a significant drop in prices before homeowners see any impact on their high levels of tappable equity. 

As a result, experts expect continued interest in home equity financing products as we round out 2022. 

“If you think about the mortgages most people have taken out in the last two years, they have rates between three to four percent. They don’t want to give up that mortgage rate [by taking out a cash-out refinance], so the next best thing is a HELOC or home equity loan,” says Scott Haymore, head of capital markets and mortgage pricing at TD Bank. 

The average rate for a $30,000 HELOC is 7.93%, up four basis points week-over-week. Home equity loan interest rates saw jumps of more than 30 basis points week-over-week. 

Here are the average home equity loan and HELOC rates as of Nov. 22, 2022: 

Loan TypeThis Week’s RateLast Week’s RateDifference
$30,000 HELOC7.93%7.89%+0.04
10-year, $30,000 home equity loan7.89%7.57%+0.32
15-year, $30,000 home equity loan7.84%7.50%+0.34

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?

HELOCs and home equity loans are both secured loans. You use your home equity, or the difference between what your home is worth and what you owe on your mortgage, as collateral. 

The main differences between a HELOC and home equity loan are how your funds are distributed and the interest rate at which you repay your loan. 

A HELOC offers a revolving line of credit, meaning you don’t receive all your funds at once. There’s a limit on the total amount you can take out, and you’ll only pay interest on the money you actually use during the draw period. It’s similar to a credit card, but experts caution against treating your home equity like one. HELOCs typically have variable interest rates, meaning your monthly payment is subject to change as rates do. 

With a home equity loan, you’re given a lump sum of cash to borrow upfront. Unlike HELOCs, most home equity loans allow you to borrow at a fixed interest rate, which may make them a more attractive option in a rising rate environment

“Homeowners, for the most part, are still viewing [a HELOC or home equity loan] as an easier way to get money out of their house,” Haymore says. 

What Consumers Should Know about Home Equity Financing

Interest rates for home equity loans and HELOCs tend to be more competitive than for unsecured loans. However, if you default on your payments for a home equity loan or HELOC, you risk losing your home. 

Experts recommend taking a calculated approach to tapping into your home’s equity.  

When deciding between a home equity loan and HELOC, consider whether you need all the loan funds at once or spread out over time. In addition, ensure you can comfortably make the monthly payments— particularly if you opt for a HELOC with a variable interest rate. 

“What’s important for borrowers is to really be aware of their options and decide what’s the best thing to do for themselves and their households,” Haymore says. 

With the Fed expected to continue rising rates, albeit at a slower pace, into 2023, borrowing with a home equity loan or HELOC will get more expensive. 

How to Get Home Equity Financing

Tapping into your home equity isn’t a complicated process, but you should still do your due diligence when applying for a home equity loan or HELOC.

You’ll fill out an application with your lender of choice, which will determine the loan amount and interest rate you qualify for with either a home equity loan or HELOC. Remember, the average rate is not necessarily the rate a lender will offer you. You may get a rate that’s significantly higher or lower than the average, depending on your financial profile and credit score. 

Before applying for home equity financing, “plan ahead and focus on cleaning up your financial picture. Whether it’s locating your income statement or taking care of any open lines of credit, consumers need to clean up everything they possibly can,” Haywood says. This will help you qualify for a more competitive interest rate. 

Beyond improving your credit score and paying off high interest debt, it’s more important than ever to shop around for lenders. When borrowing with a home equity loan or HELOC, you don’t need to use the same lender from which you got your mortgage. Take some time to see which lender can offer the most competitive interest rate. 

PRO TIP

In a rising rate environment, shop around for lenders to see who can offer you the best rate  before committing to borrowing against your home.

How to Use Home Equity Financing

The most common uses of home equity financing are for home improvement projects and debt consolidation efforts. 

“Home equity loans and HELOCs are still the most efficient way to borrow money for home renovations because of the tax deductions you can get,” Haymore says. 

Per IRS regulations, homeowners can deduct the interest paid on up to $750,000 of debt secured by their home ($375,000 for married couples filing separately) if the funds were used to “buy, build, or substantially improve a qualified home (your main or second home).” Note that this tax deduction does not apply if you use the funds for other purposes, such as consolidating debt.

If you’re looking to use your home’s equity to consolidate debt, make sure you understand how you got into debt in the first place. If you don’t address those underlying behaviors, you’ll end up right back where you started, but with less equity in your home. 

However, as long as you have a clear purpose and repayment strategy, there’s no shortage of ways you can leverage your home equity.