- Home equity loan and line of credit (HELOC) rates held steady last week.
- The main driver of increases in interest rates for home equity loan products is the Federal Reserve, which is expected to make its next rate hike in late September.
- Home equity products have grown in popularity due to rising mortgage rates and the increased popularity of remodeling as homebuying becomes less affordable.
Just like first-time homebuyers, existing homeowners who might consider an upgrade with a new home purchase are also facing high prices and rising mortgage rates.
“Usually one of the motivations for people to move is looking for a bigger, nicer home,” says Rob Cook, vice president for marketing, digital, and analytics for Discover Home Loans. With those homes becoming less affordable, demand for remodeling is increasing – along with different ways to finance it.
Because of high home prices, homeowners have record levels of equity in their homes, and they’re increasingly tapping it using home equity loans and lines of credit (HELOCs) to finance home improvement projects. High mortgage rates make tapping that equity through a cash-out refinance less appealing.
“You may be better off actually using the equity in your home,” Cook says. “You can maintain the low interest rate on your primary mortgage by getting a second lien loan and use that equity in your home to finance a project in the home that you currently have.”
Financing a remodeling project to turn your current home into your dream home is one alternative in a housing market that some experts say is facing a “housing recession,” Cook says. “That’s one of the things that we’re seeing in the marketplace and that may also cause some of the demand to lower for new homes or existing homes.”
Here are the average home equity loan and HELOC rates as of Aug. 31, 2022:
|Loan Type||This Week’s Rate||Last Week’s Rate||Difference|
|$30,000 HELOC||6.53%||6.52%||+ 0.01|
|10-year, $30,000 home equity loan||7.05%||7.05%||none|
|15-year, $30,000 home equity loan||6.99%||6.99%||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 are borrowing tools in which you use the difference between what your home is worth and what you owe on mortgages and other home loans as collateral to borrow money. Here’s the difference between these two products:
With a Home equity loan, you borrow a lump sum of cash and pay it back in installments, generally at a fixed interest rate.
HELOCs are more similar to credit cards. Your lender gives you a limit of how much you can borrow at once and you pay interest only on what you actually borrowed. The interest rate tends to be variable, generally 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 has so far raised its rate four times, most recently at the end of July, and is expected to keep doing so through the end of the year. For home equity loans, rates are also likely to keep climbing as banks’ borrowing costs rise.
Home Equity Is at Record Highs
The rise in home prices the last couple of years means homeowners have never had more equity. The real estate data firm ATTOM found that in the second quarter of 2022, nearly half of mortgaged residential properties were considered “equity-rich,” meaning mortgages and other home loans covered no more than half of their value.
Research by Black Knight, a mortgage technology and data firm, found American homeowners’ total tappable equity – what they could borrow against while still retaining 20% – hit a new record high of $11.5 trillion in the second quarter, but that growth has slowed as price growth has cooled.
Homeowners who want to tap that equity are turning to home equity products because of major increases in mortgage rates, which have made cash-out refinances less appealing. Cash-out refis made more sense when mortgage rates were at record lows, but now that rates have risen more than two percentage points since the start of the year, it doesn’t make sense to take a worse rate on your mortgage just to borrow some cash.
Home Equity Loans Have Risks
Both home equity loans and HELOCs are secured against your home, meaning if you don’t pay them back, the bank can put you into foreclosure. Note that just because the value of your house has increased doesn’t mean it will stay there forever. Real estate values are starting to fall a little bit. Your local market might even see prices fall while national averages increase.
Don’t use a home equity loan or HELOC for just anything. They tend to be used for home renovations, which can come with a big price tag but can simultaneously increase the value of your home. Experts warn against using them to finance a more expensive lifestyle or for debt consolidation.
Keep an eye on the value of your home before you take on a home equity loan or HELOC. Give yourself a buffer of available equity in case prices drop – especially if you plan on moving in the near future.