HELOCs Are More Expensive After the Fed’s Rate Hike. Why That Matters If You’re Choosing Between Fixed and Variable Rates

HELOCs Are More Expensive After the Fed's Latest Rate Hike. Getty
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Key Takeaways:

  • The average interest rate for a home equity line of credit rose significantly this week after changes by the Federal Reserve.
  • The Fed last week announced a third consecutive increase of 75 basis points in its key interest rate, which is a factor in how lenders set rates.
  • The Fed’s rate has a more direct impact on HELOCs, which often have variable rates tied to an index that tracks the rate’s change.
  • Rates for home equity loans, which aren’t as directly affected by the Fed’s changes, moved little.

Home equity borrowers are starting to feel the effects of the Federal Reserve’s latest rate hike.

Average rates for home equity lines of credit (HELOCs) jumped last week in response to the Fed’s changes, while rates for home equity loans barely budged.

The Fed’s rate hike has a more direct impact on HELOCs. They tend to have variable rates tied to an index like the prime rate, which moves in lockstep with the federal funds rate.

“What you’ll likely see is that the home equity line of credit rates for many of the institutions, they’ll see an immediate change in their rates based on the 75 basis point increase,” says Mike Shepard, senior vice president, direct consumer lending at U.S. Bank. “It may be delayed a couple of days based on the indexes that individual institutions use.”

Home equity loans, which tend to have fixed rates, will likely also see increases as a result of the Fed’s changes, although less directly. “It’s harder to predict what’s going to happen with home equity loan rates because there are a lot of things that go into it,” Shepard says.

Despite the rate increases, home equity loans and HELOCs are growing in popularity because of the dramatic rise in mortgage rates this year. The average 30-year fixed mortgage rate has doubled in the past year and now sits north of 6%. When those rates were low, homeowners who wanted to borrow money against their home’s value would use a cash-out refinance. Higher mortgage rates change the calculus.

“The consumer can get that additional $50,000 through a home equity loan or a home equity line of credit at a rate that’s higher than what their first mortgage may be, but they also aren’t repricing their existing mortgage balance in a cash-out refi,” Shepard says. “That’s why we think home equity starts to become a bigger piece of how consumers think about financing those larger ticket purchases over the next several years.”

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Here are the average home equity loan and HELOC rates as of Sept. 28, 2022: 

Loan TypeThis Week’s RateLast Week’s RateDifference
$30,000 HELOC7.12%6.75%+0.37
10-year, $30,000 home equity loan7.16%7.15%+0.01
15-year, $30,000 home equity loan7.13%7.12%+0.01

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?

When borrowing money with home equity loans and HELOCs, you use the difference between what your home is worth and what you owe on mortgages and other home loans as collateral. Here’s how these two products work:

With a home equity loan, you borrow a certain amount of cash at once and pay it back over time, generally at a fixed interest rate. 

HELOCs are more akin to credit cards. You have a limit of how much you can take out at once and you pay interest only on what was borrowed. The interest rate is often variable, usually based on a benchmark like the prime rate.

Loan experts expect interest rates for home equity loans and HELOCs to rise during the rest of 2022. The prime rate, which is the benchmark for many HELOCs, often tracks increases in short-term interest rates by the Federal Reserve. The Fed is expected to keep raising its benchmark rate through the end of the year. For home equity loans, rates are also likely to keep climbing as banks’ borrowing costs rise. 

When deciding between a home equity loan and a HELOC, one important consideration is your comfort with rising interest rates. With a variable rate product, whether it’s a HELOC or a loan, you’re likely to see higher rates in the near future. A fixed-rate product will likely come with a higher rate overall, but will be less susceptible to the changes of the market. “Are you comfortable with rates going up or are you not?” Shepard says.

Pro Tip

With interest rates rising, consider your appetite for dealing with higher rates – and higher payments – when choosing between a home equity loan and a HELOC. A home equity loan will come with more consistent payments.

How Should You Use Home Equity Loans and HELOCs?

One big difference is that a mortgage is almost always used to pay for a home. With a home equity loan or a HELOC, you can use the money for basically whatever you want. But should you?

The most popular use is for big home improvement projects, which can come with a sizable upfront cost. Many borrowers used cash-out refinances in recent years, when mortgage rates were low, Shepard says. But with mortgage rates soaring, home equity loans and HELOCs are becoming the more attractive option. 

“When the day is done, the consumer needs to be able to look at their financial situation and say is this investment that I’m going to make in my house something I can afford,” Shepard says.

Home equity loans are sometimes used to consolidate higher interest debt, like credit cards, which also get more expensive when the Fed hikes rates. Experts say you should be careful when turning unsecured debt like credit card debt into something secured by your home, as you could lose your home if you can’t pay it back. 

The important thing is not to borrow money just because of changes in the economic environment. Now might be a good time to take out a fixed-rate home equity loan, for example, because rates will rise, but that isn’t a good enough reason to borrow. “Don’t take an action just because rates are going up,” Shepard says. “Take an action because it’s the right thing to do based on your financial situation.”