Key points to remember
- Home equity loan and line of credit (HELOC) rates have remained stable this week.
- The main driver of rising interest rates for home equity loan products is the Federal Reserve, which is expected to make its next rate hike in late September.
- Home equity products have grown in popularity due to rising mortgage rates and the growing popularity of home improvement as buying a home becomes less affordable.
A tough housing market is forcing homeowners to reconsider their current home and look to a home equity loan or line of credit to improve it.
Much like first-time home buyers, existing homeowners who might be considering an upgrade with a new home purchase are also facing high prices and rising mortgage rates.
“Usually one of the motivations for people to move is to find a bigger, nicer house,” says Rob Cook, vice president of marketing, digital and analytics for Discover Home Loans. With these homes becoming less affordable, the demand for renovations is increasing – along with different ways to finance it.
Due to high real estate prices, homeowners have record levels of equity in their homes and they are increasingly using it by using loans and home equity lines of credit (HELOCs) to finance projects home renovation. High mortgage rates make tapping into that equity through cash refinancing less attractive.
“You might be better off using the equity in your home,” Cook says. “You can keep the interest rate low on your primary mortgage by getting a second mortgage and using that equity in your home to fund a project in the home you currently own.”
Financing a renovation project to turn your current home into your dream home is an alternative in a housing market that some experts say is facing a “housing recession,” Cook says. “That’s one of the things we see in the market and it can also lead to lower demand for new homes or existing homes.”
Here are the average home equity loan and HELOC rates as of August 31, 2022:
|Type of loan||Price for this week||Last week’s price||Difference|
|10-year $30,000 home equity loan||7.05%||7.05%||nothing|
|Home equity loan of $30,000 over 15 years||6.99%||6.99%||nothing|
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 are home equity loans and HELOCs?
Home equity loans and HELOCs are borrowing tools 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 Equity Loanyou borrow a lump sum of money and repay it in installments, usually at a fixed interest rate.
HELOC 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 tends to be variable, usually based on a benchmark like the preferential rate.
Lending experts expect home equity loan and HELOC interest rates to rise through the rest of 2022. preferential rate, which is the benchmark for many HELOCs, often follows increases in short-term interest rates by the Federal Reserve. The Fed has raised its key rate four times so far, most recently at the end of July, and is expected to continue to do so through the end of the year. For home equity loans, rates are also expected to continue to climb as banks’ borrowing costs increase.
Home equity is at record highs
Rising home prices over the past two years mean homeowners have never had so much equity. Real estate data company ATTOM found that in the second quarter of 2022, nearly half of mortgaged residential properties were considered “equity rich,” meaning that mortgages and other home loans covered no more than half of their value.
Research from Black Knight, a mortgage technology and data company, revealed Total usable equity of U.S. owners — which they could borrow against while retaining 20% — reached a new high of $11.5 trillion in the second quarter, but that growth slowed as price growth cooled.
Homeowners looking to tap into that equity are turning to home equity products due to significant increases in mortgage rates, which have made pullout refinances less attractive. Cash-out refis made more sense when mortgage rates were at record highs, but now that rates are up more than two percentage points year-to-date, it no longer makes sense to take a lower rate on your mortgage just to borrow some money.
Home equity loans come with risks
Home equity loans and HELOCs are secured by your home, which means that if you don’t pay them back, the bank can put you in foreclosure. Note that just because the value of your home has gone up doesn’t mean it will stay there forever. Real estate values are starting to drop a bit. Your local market might even see prices drop as national averages rise.
Don’t use a home equity loan or HELOC for just anything. They tend to be used for home renovations, which can be expensive, but can simultaneously increase the value of your home. Experts warn against using them to finance a more expensive lifestyle or for debt consolidation.
Keep an eye on the value of your home before taking out a home equity loan or HELOC. Give yourself a reserve of available equity in case prices go down, especially if you plan to move in the near future.