The central theses
- Home equity and line of credit (HELOC) rates held steady last week.
- The main reason for rate hikes on home equity products is the Federal Reserve, which is expected to make its next rate hike in late September.
- Home equity products are growing in popularity due to rising mortgage rates and the rise in popularity of remodeling as home buying becomes less and less affordable.
A challenging housing market is causing homeowners to take a second look at their current one — and turn to a home loan or line of credit to improve it.
Just like first-time homebuyers, existing homeowners who are considering upgrading when buying a new home are also faced with high prices and rising mortgage rates.
“Typically, one of the motivations for people to move is to find a bigger, nicer home,” said Rob Cook, vice president of marketing, digital and analytics at Discover Home Loans. As these homes become less and less affordable, the demand for remodeling increases—along with different ways to finance them.
Because of high home prices, homeowners have record levels of equity in their homes, and they are increasingly tapping into home equity loans and lines of credit (HELOCs) to fund home improvement projects. High mortgage rates make it less attractive to tap into that equity through a payout refinance.
“It might be better if you actually use your home’s equity,” says Cook. “You can maintain the low interest rate on your primary mortgage by getting a second lien and using that equity on your home to fund a project on the home you currently have.”
Financing a remodeling project to turn your current home into your dream home is an alternative in a housing market some experts say is poised for a “housing recession,” says Cook. “That’s one of the things we’re seeing in the market and that can also cause demand for new homes or existing homes to fall.”
Here are the average home equity interest rates and HELOC as of August 31, 2022:
|loan type||This week’s installment||course last week||difference|
|$30,000 HELOC||6.53%||6.52%||+ 0.01|
|$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 are home equity loans and HELOCs?
Home equity loans and HELOCs are borrowing instruments in which you use the difference between the value of your home and what you owe on mortgages and other home loans as collateral to borrow money. Here is the difference between these two products:
With a home loanborrow a sum of cash and pay it back in installments, usually at a fixed rate.
HELOCs are more like credit cards. Your lender 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 generally based on a benchmark such as the prime rate.
Credit experts expect interest rates on home equity loans and HELOCs to rise later in 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 continue to do so through the end of the year. Home equity interest rates are also likely to continue to rise as banks’ borrowing costs rise.
Home equity is at record highs
The rise in home prices in recent years means homeowners have never had more equity. Real estate data company ATTOM found that in the second quarter of 2022, nearly half of mortgage-backed homes were considered “equity-rich,” meaning mortgages and other home loans covered no more than half of their value.
Research by Black Knight, a mortgage technology and data company, found that American homeowners’ total vulnerable equity — what they could borrow while still retaining 20% – hit a new record high of $11.5 trillion in the second quarter reached, but this growth has slowed Price growth has cooled.
Homeowners looking to tap into that equity are turning to home equity products as soaring mortgage rates have made payout refinancing less attractive. Payout refis made more sense when mortgage rates were at record lows, but now that rates are up more than two percentage points year-to-date, there’s no point taking a worse rate on your mortgage just to borrow some cash.
Home equity loans have risks
Both home equity loans and HELOCs are secured against your home, which means the bank can put you in foreclosure 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 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.
Before taking out a home equity loan or HELOC, keep the value of your home in mind. Have a buffer of available equity in case prices fall – especially if you plan to move in the near future.