Key takeaways
- The average interest rates for home equity loans and home equity lines of credit (HELOCs) were unchanged this week.
- Rates have held fairly steady since jumping at the start of August in response to July’s Federal Reserve rate hike.
- Fed officials indicated more rate increases are likely coming as part of a bid to slow down inflation.
Interest rates for home equity loans and lines of credit tend to move in long lulls interrupted by big jumps. This week is one of the lulls as the average interest rates stayed perfectly flat this week, two weeks after the average HELOC rate jumped dramatically.
Averages for home equity loans and HELOCs were unchanged from the week prior, with the rate for a $30,000 HELOC at 6.51% and rates for similar home equity loans around 7%, according to a survey by Bankrate, which like NextAdvisor is owned by Red Ventures .
That’s good news for consumers wanting to get a loan before rates jump, but the calmness might not last too long.
The lack of movement shows how home equity rates often move in concert with increases in benchmarks, largely the prime rate, which itself moves alongside changes by the Federal Reserve to its short-term interest rate. The Fed’s latest rate change was the last week of July, and while rates moved after that action by the central bank, they’ve changed little since.
As for the prospect of future rate changes by the Federal Reserve, the minutes of July’s meeting, released Wednesday, pointed to likely future rate increases until inflation, which has been higher than it’s been for 40 years but slowed to 8.5% year-over- year in July, is on track to drop to 2%.
The Federal Reserve’s next meeting is in September.
Home equity lending is booming because of a dramatic increase in the value of homes in the past two years. A survey commissioned by the reverse mortgage lender Finance of America Reverse found that while 86% of respondents said their home’s value increased since they bought it, only 28% said they are likely to take out a home equity loan in the future. Those unlikely to do so pointed to a lack of interest or need and not wanting to take on more debt.
Here are the average rates as of Aug. 18, 2022:
| Loan Type | This Week’s Rate | Last Week’s rate | Difference |
|---|---|---|---|
| $30,000 HELOC | 6.51% | 6.51% | none |
| 10-year, $30,000 home equity loan | 7.05% | 7.05% | none |
| 15-year, $30,000 home equity loan | 6.99% | 6.99% | none |
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 Are Home Equity Loans and HELOCs?
The difference between what you owe on mortgages and other home loans is called equity. With a home equity loan or HELOC, you use that as collateral to borrow money. Here’s how they work:
Home equity loans involve borrowing a lump sum of cash and paying it back with fixed payments over a certain number of years at a certain interest rate, usually fixed.
HELOCs are somewhat like credit cards, in that the bank gives you a limit of how much you can borrow at once — a line of credit — and you pay interest only on what you borrowed. The interest rate is often variable, changing over time with the market, typically based on a benchmark like the prime rate.
Interest rates for home equity loans and HELOCs are expected to continue increasing during the rest of 2022. The prime rate, which is the benchmark for many HELOCs, tends to track increases in short-term interest rates by the Federal Reserve. The Fed has raised its rate so far four times, most recently at the end of July. For home equity loans, rates are also likely to keep climbing as banks’ borrowing costs rise, experts say.
Homeowners Have More Equity Than Ever
Largely due to a dramatic rise in home prices the last couple of years, American homeowners have never had more equity to borrow against. ATTOM, a real estate data firm, found 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.
Similar findings were made by Black Knight, a mortgage technology and data firm, in a report that showed American homeowners’ total 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 has cooled.
Homeowners who want to tap that equity are turning to home equity products because of the big increases in mortgage rates this year, which have made cash-out refinances less appealing. Cash-out refis made more sense when mortgage rates were at record lows, but rates have risen more than two percentage points since the start of the year, and it doesn’t make much sense to take a significantly worse rate on your mortgage just to get some cash
Per tip
When deciding between a home equity loan and a cash-out refinance, think about all of the money affected by a change. A refinance might have a lower interest rate than a home equity loan, but you’d also be changing the rate on the outstanding balance of your mortgage, which could have a much bigger financial impact.
There Are Risks to Home Equity Loans
Because home equity loans and HELOCs are secured against your home, if you don’t pay them back, the bank can foreclose. Also, 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.
That added risk means you shouldn’t use a home equity loan or HELOC for just anything. They’re most often used for home renovations, which can come with a big price tag but can increase the value of your home when they’re done. Experts caution against using them to finance a more expensive lifestyle or for debt consolidation.
