- Home equity loan rates inched up last week, while the rate for a HELOC stayed flat.
- Experts predict another rate hike from the Federal Reserve this week, which could impact rates for home equity products.
- HELOC interest rates are often directly tied to what the Fed does.
This week will be a different story.
With inflation at 8.2% year-over-year in September, it’s almost certain the Fed will announce another hefty hike to the federal funds rate, a short-term interest rate that determines what banks charge each other to borrow money. Experts predict the Fed will go with an increase of 75 basis points, the same as their September meeting.
“Unlike traditional mortgage rates, certain home equity products, particularly home equity lines of credit, are directly tied to what the Fed does. As a result, we’re almost certainly going to see the rates on home equity loan products increase following next week’s announcement,” says Jacob Channel, senior economist at LendingTree.
Despite rising rates, consumers remain incentivized to borrow with home equity loans and HELOCs. Americans are sitting on a near record amount of home equity, with the total tappable equity reaching $11.5 trillion in the second quarter, according to Black Knight, a mortgage technology and data firm.
“A lot of people, all of a sudden, have this additional equity in their home that they want to tap into, so we’re seeing a lot of demand for home equity loans and lines of credit,” says Niv Persaud, a CFP and managing director at Transition Planning & Guidance.
Here are the average home equity loan and HELOC rates as of Oct. 26, 2022:
|Loan Type||This Week’s Rate||Last Week’s Rate||Difference|
|10-year, $30,000 home equity loan||7.51%||7.43%||+0.08|
|15-year, $30,000 home equity loan||7.41%||7.38%||+0.03|
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?
Here’s the difference between the two products:
HELOCs function similarly to credit cards. You tap it on a revolving basis and only pay interest on what you’ve borrowed. As is the case with credit cards, there will be a limit on how much you can borrow at once. The interest rates for a HELOC are often variable, meaning it rises and falls with an index, usually the prime rate. This is something you should always pay attention to, but particularly in today’s rising rate environment.
Home equity loans are more akin to personal loans in that they provide a one-time injection of cash. You’ll pay it back over time, usually at a fixed rate. Once you take out a home equity loan, your interest payments won’t change even if rates go up.
“Home equity is still a very attractive option in this environment, relative to other forms of borrowing like a cash-out refinance, which was the preferred way to tap your equity in the last couple of years,” says Werner Loots, executive vice president of direct consumer lending at US Bank.
What the Federal Reserve Means for Home Equity Loans and HELOCs
Throughout 2022, interest rates for home equity loans and HELOCs have continued to move in tandem with the Fed’s rate hikes.
“The Fed is trying to break the economy and, unfortunately, it has to,” says Karl Wagner, partner at Biondo Investment Advisors. “Until they see less consumer spending and cooler inflation, they’re going to keep raising rates.”
As a result, borrowing with a home equity loan or HELOC is going to become more expensive – and stay that way – until the Fed can take their foot off the gas pedal.
Even so, experts are seeing increased interest in home equity products.
“Going forward, I think we’ll continue to see a push and pull between home equity burning a hole in consumers’ pockets and higher rates making that loan less appealing,” says Channel.
How to Get Home Equity Financing
To secure home equity financing, you’ll need to complete an application with a lender of your choosing. It doesn’t have to be the same lender through which you have your mortgage. Experts recommend shopping around to see who offers the best rate.
“Remember that the average rate is not the end all be all. You should always do common sense things like boosting your credit score and shopping around for lenders before applying,” says Channel. “You can potentially get rates that are higher or lower than the average rate depending on your individual circumstances.”
Another option is to get pre-qualified for home equity financing. “In many cases, you can do a loan estimate to get an idea of both interest and principal. That can help determine your comfort level,” says Loots.
How to Use Home Equity
There are many ways to use home equity loans and HELOCs, but the most common are home improvements and debt consolidation. Unlike with targeted loans, home equity products offer a lot of flexibility in how you choose to utilize them.
Be thoughtful about how you use your home equity.
“I think it’s easy to get caught up in the ‘What’s the stock market doing? What’s up with home prices? What’s the interest rate today?’ and then we fail to tie it back to our bigger picture goals and aspirations,” says Jamie Hopkins, managing partner of wealth solutions at Carson Group.
As long as you can comfortably meet both the interest and principal payments, borrowing against your house can be a more efficient and cheap way to access capital than with a personal loan.
Be aware of the risks: Your home is both your greatest asset and biggest cost. If you default on payments for a home equity loan or HELOC, you risk losing your home.