Home Equity Loan and HELOC Rates Rose This Week as Inflation Slowed Down

Home equity loan rates saw only modest changes this week as reports offered signs that the high inflation that has dominated headlines about the economy this year might be starting to cool.

The average rates for home equity loans and lines of credit (HELOCs) were up a bit, but nowhere near the significant hike seen for HELOCs last week. That move came as lenders took into account an increase in the Federal Reserve’s benchmark short-term rate as part of an ongoing campaign to rein in high inflation.

There was some positive news on the inflation front this week, as the Consumer Price Index showed inflation at 8.5% year-over-year in July, down from June’s 9.1%.

Inflation plays a role in what happens with home equity loans and HELOC rates. HELOCs with a variable rate tied to an index often move somewhat in step with changes made by the Federal Reserve, and the more persistent inflation is, the more likely the Fed is to keep raising its rate. Home equity loans have rates set more on the lender’s cost of borrowing money, which is influenced by the Fed and inflation, among other factors.

Here are the average rates as of Aug. 11, 2022:

How Do Home Equity Loans and HELOCs Differ?

When your home’s value is more than what you owe on mortgages and other home loans, that difference is called equity. With a home equity loan or HELOC, you use that cash as collateral to borrow cash. Home equity loans and HELOCs work differently:

Home equity loans are installment loans in which you borrow a lump sum of cash up front and pay it back with fixed payments over a set number of years at a set interest rate.

HELOCs are more like credit cards, in that the bank gives you a limit of how much you can borrow at once — a line of credit — paying interest only on what you borrowed. The interest rate is often variable, meaning it will change over time with the market, typically based on a benchmark like the prime rate.

Interest rates for home equity loans and HELOCs are expected to continue increasing during the rest of 2022. Many HELOCs base their variable rate on the prime rate, which tends to track increases in short-term interest rates by the Federal Reserve. The Fed has so far raised that benchmark rate four times, most recently at the end of July. For home equity loans, rates are also likely to keep climbing as banks’ borrowing costs increase.

Homeowners Have Never Had More Equity

Thanks in large part to a dramatic rise in home prices in the last couple of years, American homeowners have never had more equity to borrow against. ATTOM, a real estate data firm, reported 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.

A similar report by Black Knight, a mortgage technology and data firm, showed the total amount of American homeowners’ 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 cooled off.

Consumers looking to tap into that equity are turning more to home equity products this year because of the dramatic increases in mortgage rates, which have made cash-out refinances less attractive. Cash-out refis were popular when mortgage rates were at record lows, but mortgage rates have risen more than two percentage points since the start of the year, making consumers far less likely to want to take a worse rate on their mortgage just to get some cash

Home Equity Loans and HELOCs Can Be Risky

Like a mortgage, home equity loans and HELOCs are secured against your home. If you don’t pay it back, the bank can take your house. It’s also important to understand that just because the value of your house has increased doesn’t mean it will stay there forever. Real estate values ​​can drop. Your local market might even see prices fall while national averages increase.

That added risk means you shouldn’t use a home equity loan or HELOC for just anything. They’re most commonly used for major home renovations, which can come with a big price tag but often boost the value of your home when they’re done. Experts caution against using them to finance a more expensive lifestyle or for debt consolidation.