Key points to remember
- Home equity loan rates were little changed and home equity lines of credit (HELOC) rates were unchanged last week.
- Rates are expected to rise after the Federal Reserve raised its benchmark short-term interest rate this week.
- The impact of the Fed’s decision on HELOC rates will be direct, but the effect on home equity loan rates is less clear, experts say.
It’s about to get more expensive to borrow against the equity in your home.
And you can thank the Federal Reserve, which is expected to raise interest rates again next week in its continued effort to slow rising inflation.
Inflation has been stubbornly high for months. The latest consumer price index showed prices up 8.3% year-on-year in August, which was higher than expected. This will cause the Fed to keep its foot on the accelerator this week when it raises its benchmark short-term interest rate. The Fed is raising rates to calm demand and try to lower prices. When the Fed raises interest rates, banks also raise rates on products such as home equity loans and lines of credit.
“The disappointing consumer price index further underscores why the Fed will remain aggressive in raising interest rates and that higher interest rates will last longer,” said Greg McBride, CFA, chief financial analyst at Bankrate, which, like NextAdvisor, is owned by Red Ventures. .
Fed officials have indicated they are committed to raising interest rates if necessary to bring prices down. So far this year, the central bank has raised its key rate four times, including two consecutive hikes of 75 basis points. Observers expect another 75 point rise this week. “We’re here for as long as it takes to bring inflation down,” Fed Vice Chairman Lael Brainard said in a recent speech.
Because home equity loan rates are based on the cost to banks and other lenders of borrowing money, they will likely see an increase as a result of the Fed’s decision. For home equity lines of credit, the effect will be more direct – their variable rates are often based on an index that mirrors what the Fed is doing.
“HELOC rates in particular will be at the mercy of how much the Fed eventually needs to raise interest rates before inflation is brought under control,” McBride said.
Here are the average home equity loan and HELOC rates as of September 14, 2022:
|Type of loan||Price for this week||Last week’s rate||Difference|
|10-year $30,000 home equity loan||7.08%||7.06%||+ 0.02|
|Home equity loan of $30,000 over 15 years||7.04%||7.01%||+0.03|
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 does the Federal Reserve affect home equity loans and HELOCs?
Home equity loans and HELOCs are similar in that you use the equity in your home — the difference between its value and what you owe on your mortgage and other home loans — as collateral to borrow money. ‘silver. This means that if you don’t repay, the lender can foreclose on your home.
The way you borrow that money is quite different.
Home Equity Loans
Home equity loans are usually simple: you borrow a set amount of money, get it all in one lump sum, and then pay it back in payments over a number of years at a fixed interest rate. Home equity loan rates are based on your credit risk and the cost to the lender of accessing needed cash.
The rate the Fed should raise is a short-term rate that affects what banks charge each other to borrow money. This hike will increase costs for banks, potentially leading to higher interest rates on products such as home equity loans.
HELOCs are less straightforward. Your lender approves you for a line of credit, similar to a credit card, which is secured by the equity in your home. You have a limit on how much you can borrow at one time, but you can borrow, repay, and borrow more until your draw period ends. You will only pay interest on what you borrow, but the interest rate is usually variable and changes regularly based on market rates.
Many HELOCs have variable rates that track the prime rate, which moves in conjunction with the Fed’s benchmark rate.
When choosing between a home equity loan or a HELOC, consider whether you need the money all at once or will need to withdraw it over a period of time. A HELOC is more flexible if you don’t know exactly what you will need or when you will need it.
Home equity loans and HELOCs are becoming increasingly popular
Consumers are increasingly turning to home equity loans and HELOCs, and one of the main reasons is that other ways to turn your home equity into cash have become less attractive. Besides selling your home, the other great way to do this is through a cash refinance, but that doesn’t make as much sense in a time when mortgage rates are higher than they used to be. been since 2008.
Homeowners still have plenty of equity as house prices are still near record highs, despite a slowing housing market. And with the possibility of a looming recession, many are looking for ways to ensure they have financial options to fall back on during tough times.
“As economic uncertainty begins to set in, loans and home equity margins are a very powerful tool because they essentially allow you to take what would otherwise only be possible by selling your home or refinancing to a much higher,” Nima Ghamsari, co-founder and director of Blend, a fintech company.
While the uncertain future of the economy has some people thinking about the Great Recession, Ghamsari says there are several differences between today and yesterday when it comes to home equity loans – which have been one major drivers of the 2008 crash. Home values are expected to remain high due to the limited supply of homes and lending standards are much higher as lenders check borrowers’ ability to pay and limit the amount of equity that you can exploit. Many lenders require a significant buffer as to the value of the home that can be borrowed.
“Home values are safer and people put a buffer and they do things like check your financial situation,” Ghamsari says.
When should you consider tapping into your home equity?
Home equity loans and HELOCs have some specific advantages over other forms of debt. Because they are collateralized by property, they tend to have lower interest rates. HELOCs have particular appeal in cases where you’re unsure how much money you’ll need, and some owners keep one on hand to ensure they can access cash. if they need it. “It almost becomes like a second bank account for them in their pocket,” Ghamsari says.
The most common use of home equity loans and HELOCs is for home improvements – you borrow against your equity for something that should, at least somewhat, increase the value of your home.
Experts say you should be careful when considering home equity loans or HELOCs for certain uses. One of them is debt consolidation. This can be attractive, as the rates for home equity loans and HELOCs are lower than those for credit cards and personal loans. Some experts say there are other ways to consolidate debt — using a balance transfer credit card or cash refinance — that don’t involve as much risk.