The central theses
- The average interest rate on home equity loans and lines of credit (HELOCs) was essentially flat this week.
- Interest rates, particularly for HELOCs, move primarily in response to Federal Reserve moves. The next Fed meeting is scheduled for late September.
- Home equity products have enjoyed significant popularity as mortgage rates have risen sharply this year and demand for refinancing has fallen
This year has not been good for the mortgage market, but it has led to a resurgence in home equity loans and lines of credit (HELOCs).
That’s according to a report this week from real estate data company ATTOM, which found that the number of mortgages granted in the second quarter of the year fell 13% compared to the first quarter and 40% year over year.
Behind this decline was a significant increase in mortgage rates. The average 30-year fixed rate has risen from around 3.3% at the start of the year to 5.84% this week, according to a survey by Bankrate, which like NextAdvisor is owned by Red Ventures. This has led to a large drop in the number of refinancings. You usually don’t want to refinance from a lower mortgage rate to a higher one, and it’s often not the best idea to do so if you want to use your home equity in a payout refinance.
For homeowners interested in tapping into that home equity, the home equity loan and HELOC have become the new products of choice, the report says. The number of HELOCs issued increased 35% over Q1 2022 and 44% over Q2 2021.
“Borrowers looking to tap their equity should know that HELOC’s activity has been particularly strong with credit unions and community banks, as well as a small but growing number of custodians,” said Rick Sharga, executive vice president of market intelligence at ATTOM. “While non-bank mortgage lenders may begin to underwrite home equity loans more aggressively, they are unlikely to be active participants in the HELOC market.”
Average interest rates on common home products were broadly unchanged this week as they continue to remain relatively flat except when reacting to rate hikes by the Federal Reserve. The next Fed meeting is scheduled for late September.
Here are the average prices as of August 25, 2022:
|loan type||This week’s installment||course last week||difference|
|$30,000 10-year home equity loan||7.05%||7.05%||none|
|$30,000 15-year home equity loan||6.99%||6.99%||none|
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 is the difference between a home equity loan and a HELOC?
The difference between the value of your home and what you owe on mortgages and other home loans is called equity. With a home equity loan, or HELOC, you use that asset as collateral to borrow money. Here is the difference between these two products:
home loan involve borrowing a lump sum of money and paying it back in installments over a specified number of years, usually at a fixed rate of interest.
HELOCs are a bit like credit cards in that the bank gives you a limit on how much you can borrow at one time and you only pay interest on what you actually borrowed. 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 throughout 2022. The policy rate, which is the benchmark for many HELOCs, tends to follow 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 continue to do so through the end of the year. Home equity interest rates are also likely to rise further as banks’ borrowing costs rise, experts say.
Homeowners have a lot of equity
The dramatic rise in home prices in recent years means that American homeowners have never had more equity to borrow. ATTOM found that in the second quarter of 2022, nearly half of mortgage-backed residential properties were considered “equity-rich,” meaning mortgages and other home loans covered no more than half of their value.
Black Knight, a mortgage technology and data company, found that American homeowners’ total tapped equity — what they could borrow while still retaining 20% – hit a new record high of $11.5 trillion in the second quarter, but this growth has cooled as price growth has slowed.
Homeowners looking to tap into that equity are turning to home equity products because of the sharp hikes in mortgage rates this year that have made payout refinancing less attractive. Payout refis made more sense when mortgage rates were at record lows, but rates are up more than two percentage points year-to-date, and there’s not much point in taking a significantly worse rate on your mortgage to get some cash.
When deciding between a home equity loan or line of credit and a refinance with a payout, consider not only the interest rates of the products, but also how much your mortgage payment would increase with a refinance with a payout. It could get more expensive in the long run, even if the rate seems lower.
Home equity loans come with risks
Home equity loans and HELOCs are secured against your home, which means the bank can foreclose if you don’t pay them back. Note that just because your home’s value has increased doesn’t mean it will stay there forever. Real estate values can and will start to fall a bit. In your local market, prices could even fall while national averages are rising.
You shouldn’t use a home equity loan or HELOC for anything. They are most commonly 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.