- Home equity loan and line of credit (HELOC) rates went up a bit as lenders factored in the latest increases by the Federal Reserve.
- Borrowers are increasingly turning to home equity loans and HELOCs because this year’s huge increases in mortgage rates have made cash-out refinances more expensive.
- Experts say it’s essential to shop around with different lenders and get an apples-to-apples comparison of products before choosing one.
“We’re seeing a pretty strong demand pattern for home equity products,” says Rob Cook, vice president of marketing, digital and analytics for Discover Home Loans. “Consumers are looking for affordable ways to tap into their home without jeopardizing their primary mortgage.”
Interest rates for home equity loans and lines of credit (HELOC) have increased, but not at the same pace as mortgage rates. The average rate for a $30,000 HELOC is 7.27%, increasing 15 basis points week-over-week.
During the rest of 2022, experts expect these rates to do more of the same: keep increasing a bit.
“The home equity market, in some ways, is a mirror of what goes on in the primary mortgage market,” says Cook. The prime rate, which is the benchmark for many HELOCs, tracks increases in short-term interest rates by the Federal Reserve. Given the Fed’s ongoing bid to lower inflation, that rate is expected to keep rising through the end of year.
Here are the average home equity loan and HELOC rates as of Oct. 5, 2022:
|Loan Type||This Week’s Rate||Last Week’s Rate||Difference|
|10-year, $30,000 home equity loan||7.27%||7.16%||+0.11|
|15-year, $30,000 home equity loan||7.18%||7.13%||+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.
What’s the Difference Between a Home Equity Loan and a HELOC?
Here’s how the two products work:
A home equity loan is similar to a personal loan, except it’s secured by your home. You borrow a lump sum of cash at once and pay it back over time, generally at a fixed rate. “As a borrower, a home equity loan gives you the advantage of knowing how much the payments are going to be in a given month. People like having that certainty, especially in a turbulent rate market,” says Cook.
HELOCs are more akin to credit cards. When you borrow money with a HELOC, you have a revolving line of credit. There’s a limit of how much you take out at once and you pay interest only on what was borrowed. Unlike home equity loans, the interest rate is often variable.
Since interest rates for HELOCs usually track the benchmark prime rate, as the Fed increases their rates, “If you have an existing HELOC, you’re going to see your interest rates go up as well,” says Cook. With an existing fixed-rate home equity loan, what the Fed does won’t have an impact on your monthly payments.
You can expect interest rates for home equity loans and HELOCs to increase as the Fed’s changes make borrowing money more expensive for financial institutions.
What Should Consumers Know About Home Equity Loans and HELOCs?
Home equity loans and HELOCs allow you to get an infusion of cash – either all at once or on a revolving basis – with an application process much less arduous than that for a mortgage. Your credit history doesn’t play as big of a role in whether or not you are eligible for home equity financing, but it will impact what rates you can get, Cook says.
Before borrowing with an home equity product, remember: The loan is guaranteed by a collateral – your home. If you default on your payments, you risk losing your home.
How to get home equity financing
Have a good grip on your financial situation before you apply for a home equity loan or HELOC. Ensuring you have a plan for how you’re going to pay it back is crucial to protecting your most valuable asset: your home.
“Choose a lender you can trust,” says Cook. You’ll want to shop around with a few different lenders to see who offers the best rates.
From there, you’ll fill out an application through your chosen lender and complete the verification process. It may take a few weeks for you to have access to your loan or line of credit.
How to use home equity
Home equity loans and HELOCs can be used for multiple purposes. The most common uses are for home improvements – which can boost the value of your home over time – and debt consolidation. Using home equity to consolidate debt can be risky if you don’t address the behavior that got you into debt. You don’t want to run into the same problem down the road.
Be thoughtful about how you tap into your home equity. “Do your homework before you make the big decision,” Cook says.
“Make sure you ask questions upfront to understand what rates and fees are associated with your loan options,” Cook says. “What you really want is a true apples-to-apples comparison. Sometimes there’s so much fixation on the rate that people forget about some of the fees associated with these products.”
When tapping into your home equity, ensure you have a set plan for how you’re going to pay it back.