The Latest Fed Move Will Push HELOC Rates Up, But They Might Be Topping Out Soon

An image of the Federal Reserve is used to illustrate an article about home equity rates. Credit: Getty Images
The Federal Reserve on Wednesday announced its latest rate hike, which will have an impact on interest rates for home equity lines of credit.
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Key Takeaways

  • The average interest rates for home equity loans and lines of credit were essentially flat last week.
  • The Federal Reserve again raised its benchmark interest rate, but only by half a percentage point. That could push rates higher.
  • Experts say the Fed is likely close to the top of where it will raise rates this year, meaning HELOC and home equity loan rates might not move much higher.

The Federal Reserve raised its benchmark short-term interest rate for the seventh straight time this year, meaning home equity lines of credit are expected to once again get more expensive.

But experts say the central bank might not have much further to go in terms of increases — and HELOC borrowers might not see rates rise too much more. 

HELOCs tend to have variable interest rates that track the Fed’s federal funds rate, so homeowners can see their payments rise when the Fed hikes rates even if they don’t borrow more money. With the Fed getting close to its ceiling, that might not be as much of a worry, experts say.

“From where we started the year to where we are now, the customers getting a home equity line now have a little payment risk but not much,” says Vikram Gupta, executive vice president and head of home equity at PNC Bank. “They should look at that variable rate, add two percentage points to it, and say ‘am I comfortable with it’?”

The Federal Reserve last week announced it would increase the federal funds rate by another 50 basis points, meaning HELOCs with variable rates will see increases. For new customers those hikes may be balanced by low introductory rates for a while. Home equity loans might also see rate increases, although those are less directly tied to the Fed’s actions.

Here are the average home equity loan and HELOC rates as of Dec. 14, 2022: 

Loan TypeThis Week’s RateLast Week’s RateDifference
$30,000 HELOC7.31%7.30%+ 0.01
10-year, $30,000 home equity loan7.93%7.91%+ 0.02
15-year, $30,000 home equity loan7.87%7.86%+ 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?

Home equity loans and HELOCs are ways of borrowing in which you use your home equity — the difference between your home’s value and what you owe on your mortgage — as collateral. This typically allows for a better rate than a comparable unsecured loan, but the risk is that if you fail to pay the money back, the lender can foreclose and you could lose your home. 

Here’s how home equity loans and HELOCs work

With a home equity loan, you take out a certain amount of cash and, usually, pay it back at a fixed interest rate. That means you’ll know what your monthly payment will be every month, making it easier to budget. That might be appealing given today’s rising rate environment

A HELOC functions more like a credit card. You can tap a revolving line of credit. After a draw period, you’ll have a certain amount of time to pay the money back, and you’ll only pay interest on what you’ve borrowed. HELOCs often have interest rates that move with the market, meaning your payment is harder to predict.

What the Federal Reserve Is Doing

The Federal Reserve has been raising rates this year as part of a bid to address the highest inflation in 40 years. Higher interest rates discourage consumers from borrowing and spending, with the goal of lowering prices by dampening demand. 

This month’s hike by the Fed shows the central bank is starting to slow down its rate increases as it approaches a level it expects will be enough to bring inflation down. The 50-basis-point hike comes after four consecutive increases of 75 points. 

“I think the market has priced in through the end of the year all of the anticipated rate hikes,” says Cristy Ward, chief strategy officer at Mortgage Connect, a company that provides services for mortgage and home equity lenders. “I do anticipate further rate hikes next year. We anticipate they’re going to slow down next year.”

The risk that comes with the Fed’s tightening efforts is that they’ll slow the economy down too much and trigger a recession. “We expect next year to slow down,” Gupta says. “It’s going to be a slower market for everything. This recession is coming. We’re seeing a number of indicators, particularly in housing, that lead us to believe that things are slowing down.”

How Consumers Should Think About Home Equity in 2023

Home equity borrowing can be an opportunity, but it also carries significant risk. With 2023 potentially shaping up to be a difficult year for the economy, experts say you should keep a close eye on the potential problems you might face, such as job or income loss.

Here’s what to consider as you think about home equity borrowing:

Borrow for a Purpose

Don’t just take out debt because you can. Remember that a home equity loan or HELOC carries the risk that you’ll lose your home if you fail to repay. 

“When you’re obtaining a HELOC or a (home equity loan), it needs to be for a good reason,” Ward says. “Are you paying off high-interest credit card debt? Are you improving your home?”

Home improvement is one of the most popular reasons for tapping equity, and that should continue into 2023, Gupta says. “People will be spending on home improvement. They’re going to use money borrowed from their home to do that. That’s going to go on.”

Be Wary of Borrowing to Cover Expenses

Experts worry a recession, which is a possible outcome of the Fed’s rate hikes, will cause more people to borrow against their house to pay the bills. That’s risky, as having a loan or line of credit adds another bill on top, and failure to repay could jeopardize your home.

“Helping to pay for current bills is not a good reason to put that asset at risk,” Ward says.

Lenders do expect the number of people borrowing against equity to cover expenses to increase, but Americans’ relatively high rates of savings compared to past economic downturns should mitigate that risk, Gupta says.

Should You Lock in a Rate?

Many HELOC lenders allow borrowers to lock their rate for a certain balance, essentially turning a variable-rate HELOC into a fixed-rate home equity loan. Consumers worried about the uncertainty of rate changes can consider that if they want to guarantee a certain payment.

“Many of these home equity products, unlike credit cards or anything else which is variable, allow you to lock in the price so that you have payment certainty,” Gupta says.

Pro Tip

If you’re worried about the interest rate on your HELOC rising, see if your lender gives you the opportunity to lock a rate for your balance, essentially converting it into a fixed-rate loan.