Key points to remember
- Home equity loans and lines of credit (HELOC) rates rose slightly this week as lenders priced in the latest increases from the Federal Reserve.
- Borrowers are increasingly turning to home equity loans and HELOCs as huge increases in mortgage rates this year have made cash refinances more expensive.
- Experts say it’s essential to shop around with different lenders and get a product comparison between Apples before settling on one.
The housing market is cooling, but home equity products are in vogue.
The reason: High mortgage rates – nearly 7% today, after being around 3% a year ago – are suppressing demand for cash-out refinances.
“We’re seeing pretty strong demand for home equity products,” says Rob Cook, vice president of marketing, digital and analytics for Discover Home Loans. “Consumers are looking for affordable ways to access their home without jeopardizing their primary mortgage.”
Interest rates for home equity loans and lines of credit (HELOCs) have risen, but not at the same pace as mortgage rates. The average rate for a $30,000 HELOC is 7.27%, rising 15 basis points week over week.
For the rest of 2022, experts expect these rates to do the same thing: keep rising a bit.
“The home equity market, in some ways, is a mirror image of what’s happening in the primary mortgage market,” Cook says. The prime rate, which is the benchmark for many HELOCs, follows increases in short-term interest rates by the Federal Reserve. Given the Fed’s continued attempt to reduce inflation, this rate should continue to rise through the end of the year.
Here are the average home equity loan and HELOC rates as of October 5, 2022:
|Type of loan||Price for this week||Last week’s price||Difference|
|10-year $30,000 home equity loan||7.27%||7.16%||+0.11|
|Home equity loan of $30,000 over 15 years||7.18%||7.13%||+0.05|
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.
What is the difference between a home equity loan and a HELOC?
When you borrow money with home equity loans and HELOCs, you use the difference between the value of your home and what you owe on mortgages as collateral.
Here’s how the two products work:
A home equity loan is similar to a personal loan, except it’s secured by your home. You borrow a lump sum of cash all at once and repay it over time, usually at a fixed rate. “As a borrower, a home equity loan gives you the advantage of knowing the amount of payments in any given month. People like to have that certainty, especially in a turbulent rates market,” Cook says.
HELOC are more like credit cards. When you borrow money with a HELOC, you have a revolving line of credit. There is a limit to the amount you withdraw at one time and you only pay interest on what has been borrowed. Unlike home equity loans, the interest rate is often variable.
Since HELOC interest rates generally track the benchmark prime rate, as the Fed raises rates, “If you have an existing HELOC, you’re also going to see your interest rates go up,” Cook says. With an existing fixed rate home loan, what the Fed does will not impact your monthly payments.
You can expect home equity loan and HELOC interest rates to rise as Fed changes make borrowing more expensive for financial institutions.
What should consumers know about home equity loans and HELOCs?
Home equity loans and HELOCs allow you to get a cash injection – either all at once or on a revolving basis – with a much less arduous application process than that of a mortgage. Your credit history doesn’t play as big of a role in whether or not you qualify for home equity financing, but it will affect the rates you can get, Cook says.
Before borrowing with a home equity product, remember: The loan is secured by collateral – your home. In the event of default, you risk losing your accommodation.
How to get home equity financing
Have a good grasp of your financial situation before applying for a home equity loan or HELOC. Making sure you have a plan for how you’re going to repay is key to protecting your most valuable asset: your home.
“Choose a lender you can trust,” Cook says. You’ll want to shop around with a few different lenders to see who offers the best rates.
From there, you will complete an application through the lender of your choice and complete the verification process. It may take a few weeks for you to access your loan or line of credit.
How to Use Home Equity
Home equity loans and HELOCs can be used for multiple purposes. The most common uses are home improvements – which can increase the value of your home over time – and debt consolidation. Using the equity in your home to consolidate debt can be risky if you don’t address the behavior that put you in debt. You don’t want to encounter the same problem later.
Think about how you tap into your home equity. “Do your homework before making the big decision,” says Cook.
“Be sure to ask questions upfront to understand what rates and fees are associated with your loan options,” Cook says. “What you really want is a real apples-to-apples comparison. Sometimes there is so much fixation on the price that people overlook some of the fees associated with these products.
When tapping into your home’s equity, make sure you have a clear plan for how you’re going to pay it back.