The central theses
- Interest rates on home equity loans and lines of credit were basically unchanged last week.
- Interest rates tend to move most significantly in the wake of rate hikes by the Federal Reserve. The Fed is expected to do so later this month.
- While the number is still large, falling home prices mean homebuyers have less equity to tap into their homes than before.
The recent slowdown and fall in home prices means homeowners may have slightly less equity than they did just a few months ago — although it’s still more than enough to spur ongoing demand for home equity loans and lines of credit (HELOCs).
Tapped equity — the amount a homeowner could borrow and still retain a 20% interest — hit a record in the second quarter of the year, but peaked in May and fell 5% in June and July, according to the mortgage technology and finance industry Black Knight data company.
In some large West Coast markets, where prices were much higher, available equity declined even more.
Blame it on a monthly drop in house prices as slower demand — caused by higher mortgage rates forcing buyers out of the market — begins to push prices down. House prices are still up 14% year-on-year, but they’re falling from the May highs. “Without timely, granular data, market-moving trends don’t become apparent until they’re right in front of you — like a sudden shift in the biggest one-month drop in home prices in more than a decade,” Ben Graboske, President of Data and Analytics for Black Knight, said in a statement.
The good news is that high property values mean the market is in a good position to deal with falling prices without causing the kind of problems it experienced during the late 2000s financial crisis. Black Knight said if every home fell in value by 5%, less than 1% would be underwater – meaning the total value of equity-backed loans would exceed – with the vast majority having been bought in recent months.
Homeowners have increasingly turned to home equity loans rather than payout refinances, Black Knight reported. Home equity lending rose nearly 30% quarter-on-quarter, while cash-out refis fell 30% as mortgage rates rose.
Here are the average interest rates on home equity loans and HELOCs as of September 7, 2022:
| loan type | This week’s installment | course last week | difference |
|---|---|---|---|
| $30,000 HELOC | 6.51% | 6.53% | – 0.02 |
| $30,000 10-year home equity loan | 7.06% | 7.05% | + 0.01 |
| $30,000 15-year home equity loan | 7.01% | 6.99% | + 0.02 |
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.
What’s the Difference Between Home Equity Loans and HELOCs?
Home equity loans and HELOCs are loan products where you use the value of your home as collateral in addition to your mortgage debt and other home equity loans. There are some differences between them:
home loan It involves borrowing a sum of cash and paying it back in installments, usually at a fixed interest rate.
HELOCs are more like credit cards. You have a limit on how much you can borrow at one time, and you only pay interest on what you borrow. The interest rate is usually variable and is often based on a benchmark such as the prime rate.
Experts expect interest rates on home equity loans and HELOCs to rise by the end of 2022. The policy rate, which is the benchmark for many HELOCs, often follows increases in short-term interest rates by the Federal Reserve. The Fed has raised interest rates four times so far, most recently in late July, and is expected to do so through the end of the year, including later this month. Home equity interest rates are also likely to continue to rise as banks’ borrowing costs rise.
Home equity loans can be risky
Home equity loans and HELOCs are secured against your home. That means if you don’t pay them back, the bank can put you in foreclosure. Note that just because your home’s value has increased doesn’t mean it will stay there forever. Real estate values are starting to fall a bit. In your local market, prices could even fall while national averages are rising.
Don’t use a home equity loan or HELOC for anything. They are typically used for home renovations, which can come with a high price tag but can also increase the value of your home. Experts warn against using them to finance a more expensive lifestyle or to consolidate debt.
“I wouldn’t necessarily recommend converting unsecured debt or credit card debt into secured debt,” Leslie Tayne, founder and chief counsel at Tayne Law Group, told us. “You wouldn’t lose your home to credit card debt, but you could lose your home if you default on a HELOC.”
pro tip
Experts do not recommend using a home equity loan for debt consolidation. Converting high-interest unsecured debt, like credit card debt, into debt secured by your home could be risky if you’re still struggling to pay it all off.
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