Home Equity and HELOC Rates Keep Rising. How Homeowners Can Prepare for More Increases Ahead

Home equity loan and line of credit (HELOC) rates are up for the second consecutive week. The increases came after the Federal Reserve last week hiked its benchmark short-term interest rate by 75 basis points in an effort to combat persistently high inflation.

The Fed’s move is expected to increase borrowing costs for banks and other lenders — higher costs that are passed along to consumers in the form of higher interest rates. For HELOCs, which have a variable rate component based on an index that tracks with the Fed’s changes, the move translates more directly into higher rates. Those variable rates should move up 75 points in step with the Fed’s news, although that often happens starting with the month following the central bank’s announcement, so consumers should see those increases in July, according to Vikram Gupta, head of home equity for PNC Bank .

More Fed increases are expected through the end of the year, although “the pace of those changes will continue to depend on the incoming data and the evolving outlook for the economy,” Federal Reserve Chairman Jerome Powell told a US Senate committee this week.

Here are the average rates as of June 23, 2022:

Loan TypeThis Week’s RateLast Week’s rateDifference
$30,000 HELOC4.70%4.49%0.21%
10-year, $30,000 home equity loan6.83%6.76%0.07%
15-year, $30,000 home equity loan6.83%6.71%0.12%

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 the Difference Between a Home Equity Loan and a HELOC?

The difference between what your home is worth and what you owe on mortgages and other home loans is called equity. With a home equity loan or HELOC, both considered types of second mortgages, you use that equity as collateral to get a loan, often to fund home improvement projects or other major expenses.

Home equity loans and HELOCs look different:

Home equity loans are similar to a fixed-rate mortgage, in which you borrow a certain amount of cash and pay it back over a set number of years at a certain interest rate.

HELOCs are more akin to credit cards, in that the bank gives you a maximum amount you can borrow at any one time during a draw period and you can take out some, pay it back, and borrow more until the draw period ends. You only have to pay interest on what you borrow. The interest rate tends to be variable, meaning it will change over time with an index like the prime rate.

What Factors Affect Home Equity Loan and HELOC Rates?

Experts anticipate home equity interest rates will continue to climb throughout 2022. Lenders often base the variable rates of HELOCs on the prime rate published by the Wall Street Journal, which generally tracks changes to short-term interest rates by the Federal Reserve. The Fed has already raised those rates three times this year, the latest by 75 basis points last week. That was the Fed’s largest single increase since 1994.

“We’re in a rising rate environment,” Gupta told us. “It’s tied to an index that is going up, ergo the rate will go up.”

Home equity loan rates are set more like mortgage rates. Experts also expect them to keep climbing.

Consumers are turning more and more to home equity products in part because of the significant increase in mortgage rates, which has made cash-out refinances less appealing. Cash-out refis were popular when mortgage rates were at record lows and home prices were increasing, but mortgage rates are up 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.

There Are Risks to 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.

Per tip

Be careful not to spend too freely with a HELOC. It functions a bit like a credit card, and while the interest rate is much lower, you will still have to pay the money back eventually.

Be wary not to overdo it. HELOCs, especially, can be tempting for some borrowers, leading to taking out more debt than you need, experts say. “Debt can be a powerful tool, but it can also be abused,” warns Devin Pope, partner and senior wealth advisor at Albion Financial Group.

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.