Home equity loan and line of credit (HELOC) rates rose slightly this week.
The Federal Reserve’s decision this week to raise its benchmark short-term interest rate by 75 basis points will likely translate into higher rates for HELOCs in the near future, which often have a variable rate that tracks an index affected by the Fed’s changes.
Here are the average rates as of June 15, 2022:
|Loan Type||This Week’s Rate||Last Week’s rate||Difference|
|10-year, $30,000 home equity loan||6.76%||6.71%||+0.05%|
|15-year, $30,000 home equity loan||6.71%||6.68%||+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 US markets.
What’s Going On With Home Equity Loans and HELOC Rates?
Interest rates for home equity loans and HELOCs are expected to climb through the end 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 is expected to keep raising its benchmark rate to combat high inflation. This week, the Fed raised that rate by 75 basis points – the largest single increase since 1994 – which will likely correlate to HELOC rates rising by a similar amount.
“We’re in a rising rate environment,” Vikram Gupta, head of home equity for PNC Bank, told us. “It’s tied to an index that is going up, ergo the rate will go up.”
For home equity loans, rates are set more like mortgage rates, and are also likely to keep climbing as banks’ borrowing costs increase. One thing could affect that – a recession could change trends in interest rates, Rob Cook, vice president of marketing, digital and analytics for Discover Home Loans, told us. “My outlook is it will either be flat or an upward trend for rates in the course of this year.”
Consumers are increasingly turning to home equity products due in part to the recent dramatic increases in mortgage rates, which have made cash-out refinances less attractive. Cash-out refis were popular in recent years as mortgage rates were at record lows and home prices increased, 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 on a significantly worse mortgage rate just to get some cash.
Know how your home equity loan works and how the interest rate is set. HELOCs often have variable rates that change when the Federal Reserve raises interest rates, as is happening now.
How Do Home Equity Loans and HELOCs Work?
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 the equity as collateral to borrow money, often to fund home improvement projects or other major expenses.
Home equity loans and HELOCs work differently:
Home equity loans function similarly to a fixed-rate mortgage, in which you borrow a lump sum of cash up front and pay it back in installations over a set number of years at a set interest rate.
HELOCs are more like credit cards, in that the bank gives you a maximum amount you can borrow at once during a draw period – a line of credit – and you can take out some, pay it back, and borrow more until the draw period ends. You’ll pay interest only on what you borrow. The interest rate is usually variable, meaning it will change over time with what the going rate is, usually based on a benchmark like the prime rate published by the Wall Street Journal.
What Borrowers Should Know About Home Equity Loans and HELOCs
Like a mortgage, home equity loans and HELOCs are secured against your home. That means if you don’t pay it back, the bank can take your house. Be careful when you borrow. “If it’s not a need and it’s just some sort of desire or want, you should really ask yourself: Is this something that is wise?” Linda Sherry, director of national priorities for Consumer Action, a national advocacy group, told us.
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 market might also see prices fall while national trends are upward. “I think you have to look at it as if the amount you could sell your house for might go down in the future and you don’t want to borrow too much against it because at closing you’d have to pay back an unusually large sum,” Sherry says. “You might end up underwater in a really bad scenario, where you would owe back more at closing than you actually were able to sell the house for.”
If you understand the risks and know you can pay the money back, home equity loans and HELOCs can provide lower interest rates than other types of borrowing. Experts say it’s wise to be careful with any kind of borrowing, and do it only in situations where you’re confident you’ll have the cash in the future to repay.