- Home equity and line of credit (HELOC) interest rates are up slightly this week.
- The Federal Reserve raised its short-term interest rate by 75 basis points, which will push up the cost of borrowing.
- The Fed’s hike will have the most immediate impact on HELOCs, which often have floating rates tied to central bank activity.
- If you have a variable-rate HELOC, be careful about borrowing more money, as rates are likely to go up for a little longer, experts say.
Expect to pay more if you borrow money against your home. Thanks Federal Reserve.
That’s not just the case if you’re planning on taking out a new home loan or line of credit (HELOC). If you already have a HELOC or variable rate loan, this will go up.
The Fed announced last week that it would raise its short-term reference rate – the federal funds rate – by 75 basis points as part of its ongoing attempt to stem persistently high inflation. According to the Bureau of Labor Statistics, August prices were 8.3% higher than a year earlier, which was higher than expected.
This increase in the federal funds rate is intended to discourage spending and encourage saving to drive down prices.
“Inflation is a big concern for people,” said Brian Walsh, senior manager of financial planning at SoFi, a national personal finance and credit firm. “It affects everyone, and it’s particularly damaging to those on the lower end of the income spectrum. The Fed needs to get inflation under control and has relatively limited tools to do so. Whether it’s perfect or not, they have to use the tools at their disposal. One of the most important is the increase in interest rates.”
A higher federal funds rate means higher interest rates on all types of loans and will have a particularly direct impact on HELOCs and other variable rate products that move in line with central bank changes.
“However you cut it, it’s not going to be fun to have a higher payment for the same amount of money every month,” says Isabel Barrow, director of financial planning at Edelman Financial Engines, a national financial planning firm.
Here are the average home equity interest rates and HELOC as of September 21, 2022:
|loan type||course last week||price of the previous week||difference|
|$30,000 10-year home equity loan||7.15%||7.08%||+0.07|
|$30,000 15-year home equity loan||7.12%||7.04%||+0.08|
How these prices are calculated
These rates come from a survey conducted by Bankrate, which, like NextAdvisor, is owned by Red Ventures. The average values are determined from a survey of the top 10 banks in the top 10 US markets.
How will the Fed’s rate hike affect home equity loans and HELOCs?
Home equity loans and HELOCs are similar. You use the equity in your home — the difference between its value and what you owe on your mortgage and other home loans — as collateral to get a loan. That means if you don’t pay it back, the lender can mortgage your home.
They differ in how you borrow the money.
Home equity loans are usually fairly simple, as you borrow a set amount of cash upfront and then pay it back at a fixed rate over a set number of years. Home equity loan interest rates are based on your credit risk and the cost to the lender to access the cash you need.
The Fed’s benchmark interest rate is a short-term interest rate that affects which banks charge each other to lend money. This increase will increase costs for banks and potentially lead to higher interest rates on products such as home equity loans.
Home equity interest rates tend to be slightly higher than HELOCs, but that’s because they generally have fixed interest rates. They don’t take the risk that interest rates will rise in the future — as they probably will. “You have to pay a little more interest to get that risk reduction,” says Barrow.
HELOCs are similar to a credit card backed by your home equity. You have a limit on how much you can borrow at one time, but you can borrow some, pay it back, and borrow more. You only pay interest on what you borrow, but the interest rate is usually variable and changes periodically as market interest rates change.
Many HELOCs have floating rates that replicate the policy rate, which moves as the Fed’s policy rate moves.
“For people with variable rates, whether it’s a HELOC or a home equity loan, we expect them to go up as the Fed hikes rates,” Walsh says. “These rates are based on the federal funds rate, which is essentially the fed funds rate plus 3%. With the Fed interest rate rising 75 basis points, we would expect HELOC rates to rise 75 basis points.”
Adjustable rate HELOCs will see this rate hike after the Fed’s last rate hike and for the foreseeable future. Keep this in mind when deciding how much to borrow and what to spend it on.
What can you use home equity loans and HELOCs for?
While a mortgage is primarily used to pay for a home, you can use a home equity loan, or HELOC, for basically anything. But just because you can doesn’t mean you should.
The most common use is for home improvement jobs, particularly those that are expected to add value to your home. With the near-term future of the economy uncertain, Walsh advises caution when borrowing. Think about why you want to tap into your home equity and decide if it’s worth the likely higher interest costs.
“We don’t want people to get into the habit of treating their home equity like a piggy bank or like a credit card for discretionary purposes,” he says.
Home equity loans can be useful for consolidating higher-interest debt, like credit cards, which also get more expensive when the Fed hikes rates. Experts advise caution when converting unsecured debt into secured debt — you risk losing your home if you can’t pay it back. When you decide to get a home equity loan or HELOC to get out of a credit card debt hole, Walsh says the most important thing is to make sure you’re not digging yourself a deeper hole at the same time.
“If you’re using a HELOC or a home equity loan to consolidate credit card debt, I wish it was just mandatory that you stop spending on a credit card,” says Walsh. “What ends up happening is someone consolidates their credit card debt and a few years later they now have their home loan or HELOC on top of the new credit card debt because they didn’t address the underlying problem that got them credit card debt too.” start.”
How will the Fed’s September hike affect existing home equity and HELOCs?
If you already have a fixed-rate home-equity loan, “Honestly, it doesn’t matter what the Fed does,” says Walsh.
The Fed plays a big role in HELOCs and variable rate lending. Because these rates are going to increase, and will likely continue to increase for the foreseeable future, you should think carefully about how you use them. “It’s really important to know if you have a loan that can be adjusted,” says Barrow. “If you do, you have to be prepared for that loan to adjust upwards, which means it’s going to cost you more and more every month.”
If you just borrowed a lot of money in a HELOC, an option that might seem counterintuitive could save you a lot of money, Barrow says. You could refinance with a payout even though mortgage rates are above 6% if the overall savings in your HELOC offset the cost of switching to a higher mortgage rate. “It’s not a foregone conclusion that a refi makes sense, but you definitely have to be prepared for a higher price tag for a HELOC,” she says.
Interest rates will not stop rising with this hike. The Fed is expected to step on the gas through the end of the year, at least until inflation is on the way down towards 2%. Consumers should be wary of taking on too much variable-rate debt.
“We can look at it and say a sane person would say the Fed will keep raising rates, so it’s getting more and more expensive for me to borrow money from a HELOC and it’s going to hurt my payments,” Walsh says. “In general, most consumers do not behave very rationally. They tend to underestimate this and will be surprised if they don’t discuss it with someone who can weigh the pros and cons with them while using their HELOCs.”