Half of Mortgaged Homes Are ‘Equity-Rich,’ But Borrowing With a HELOC Just Got More Expensive

The average home equity line of credit rate is a lot higher today than it was a week ago.

Blame the Federal Reserve for some of the 1.38 percentage point jump, to 6.38%, but not for all of it.

The Fed’s decision last week to raise its benchmark short-term interest rate by 75 basis points played a direct role in the rising rate for HELOCs, as many have a variable rate tied to a standard like the prime rate, which directly follows the Fed’s changes , says Greg McBride, chief financial analyst at Bankrate, which like NextAdvisor is owned by Red Ventures.

But a lot of this week’s big increase is due to the expiration of promotional rates for multiple lenders, McBride says. As the prime rate and lenders’ borrowing costs rise, HELOC rates will continue to rise.

The big change in rates comes as new data show nearly half of homes with a mortgage are “equity-rich,” meaning their available equity is equal to or more than what’s owed on the mortgage and other loans.

Borrowers should keep an eye on what’s expected for home equity loans as rates move quickly, says Michael Pugh, president and CEO of Carver Federal Savings Bank.

“We might expect to see some borrowers deciding whether or not, if they haven’t locked in on their interest rates, whether they can actually afford the home that they wanted to purchase or afford the home equity loan that they were applying for,” Hey says.

Homeowners considering tapping their home equity for a major project should understand, as rates change quickly, their options around fixed-rate products like most home equity loans and variable-rate products like most home equity lines of credit. Home equity loan rates, which don’t directly follow the Fed’s changes, were virtually the same this week as last week.

Here are the average rates as of Aug. 4, 2022:

What Are Home Equity Loans and HELOCs?

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 borrow cash with that equity as collateral, often to fund home improvement projects or other major expenses.

Home equity loans and HELOCs work differently:

Home equity loans are installment loans similar to a fixed-rate mortgage, 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 an amount you can borrow during a draw period — a line of credit — and you can take out some, pay it back, and borrow more, up to that limit, until the draw period ends. You’ll pay interest only on what you borrow. The interest rate is often variable, meaning it will change over time with what the going rate is, typically based on a benchmark like the prime rate.

Homeowners Have Record Equity

A pair of recent reports highlight just how much more equity American homeowners have now than they did in the recent past, thanks in large part to a dramatic rise in home prices in the last couple of years. 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.

“While home price appreciation appears to be slowing down due to higher interest rates on mortgage loans, it seems likely that homeowners will continue to build on the record amount of equity they have for the rest of 2022,” Rick Sharga, executive vice president of market intelligence at ATTOM, said in a statement.

What Affects Home Equity Loan and HELOC Rates?

Interest rates for home equity loans and HELOCs are expected to keep rising through the end of 2022. Many HELOCs base their variable rate on the prime rate published by the Wall Street Journal, 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, the most recent being at the end of July. The Fed is expected to keep raising that rate to combat high inflation. For home equity loans, rates are also likely to keep climbing as banks’ borrowing costs increase.

Consumers are turning more 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.

Experts also say you should keep an eye on more than just the rate for these loan products. They often come with fees, which can make one product with a lower rate actually cost you more.

There Are Risks to Home Equity Loans and HELOCs

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.

“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,” Linda Sherry, director of national priorities for Consumer Action, a national advocacy group, told us. “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.”