Home equity loan rates saw only modest changes this week as reports gave signs that the high inflation that has dominated economic headlines this year may be starting to ease.
Average home equity loans and lines of credit (HELOC) rates rose slightly, but nowhere near the significant increase seen for HELOCs last week. The move came as lenders factored in a hike in the Federal Reserve’s short-term benchmark rate as part of an ongoing campaign to contain high inflation.
There was some positive news on the inflation front this week, as the Consumer price index posted 8.5% year-on-year inflation in July, down from 9.1% in June.
Inflation plays a role in what happens with home equity loans and HELOC rates. Index-linked floating rate HELOCs often move somewhat in step with changes made by the Federal Reserve, and the longer inflation persists, the more likely the Fed is to keep raising its rate. Home equity loans have rates set more on the lender’s cost of borrowing money, which is influenced by the Fed and inflation, among other factors.
Here are the average rates as of August 11, 2022:
|Type of loan||Price for this week||Last week’s price||Difference|
|10-year $30,000 home equity loan||7.05%||6.91%||+0.14|
|Home equity loan of $30,000 over 15 years||6.99%||6.92%||+0.07|
How these rates are calculated
These rates come from a survey conducted by Bankrate, which, like NextAdvisor, is owned by Red Ventures. Averages are determined from a survey of the top 10 banks in the 10 major US markets.
How do home equity loans and HELOCs differ?
When your home is worth more than you owe on mortgages and other home loans, that difference is called equity. With a home equity loan or HELOC, you use this money as collateral to borrow money. Home equity loans and HELOCs work differently:
Home Equity Loans are installment loans where you borrow a lump sum of money up front and repay it with fixed payments over a set number of years at a set interest rate.
HELOC are more like credit cards, in that the bank gives you a limit on how much you can borrow at one time – a line of credit – paying interest only on what you borrow. The interest rate is often variable, meaning it will change over time with the market, usually based on a benchmark like the preferential rate.
Interest rates for home equity loans and HELOCs are expected to continue to rise through the remainder of 2022. Many HELOCs base their variable rate on the preferential rate, which tends to follow increases in short-term interest rates by the Federal Reserve. The Fed has raised that benchmark rate four times so far, most recently in late July. For home equity loans, rates are also expected to continue to climb as banks’ borrowing costs increase.
Homeowners have never had so much net worth
Thanks in large part to a dramatic rise in home prices over the past two years, American homeowners have never had so much equity to borrow. ATTOM, a real estate data company, reported that in the second quarter of 2022, nearly half of mortgaged residential properties were considered “equity rich,” meaning that mortgages and other home loans were not covering more than half of their value.
A similar report from Black Knight, a mortgage technology and data company, showed that total usable equity of US owners — which they could borrow against while retaining 20% — hit a new high of $11.5 trillion in the second quarter, but that growth has slowed as price growth has slowed.
Consumers looking to tap into that equity are turning more to home equity products this year due to dramatic increases in mortgage rates, which have made cash refinances less attractive. Withdrawal refis were popular when mortgage rates were at record highs, but mortgage rates have risen more than two percentage points since the start of the year, making consumers much less likely to want to take a rate lower on their mortgage just to get some. cash.
Home equity loans and HELOCs can be risky
Like a mortgage, home equity loans and HELOCs are secured by your home. If you don’t repay, the bank can repossess your house. It’s also important to understand that just because the value of your home has gone up doesn’t mean it will stay there forever. Real estate values can drop. Your local market might even see prices drop as national averages rise.
This added risk means you shouldn’t use a home equity loan or HELOC for just anything. They are most often used for major home renovations, which can be expensive, but often increase the value of your home when completed. Experts warn against using them to finance a more expensive lifestyle or for debt consolidation.
A home equity loan or HELOC is often a good, relatively cheap way to borrow money, but the risk it places on your home means you need to be careful about what you use it for. Experts advise against using a HELOC to fund a more expensive lifestyle.