Interest rates for home equity loans and lines of credit tend to move in long lulls interrupted by big jumps. This week is one of the lulls as average interest rates have remained perfectly flat this week, two weeks after the average HELOC rate jumped dramatically.
Averages for home equity loans and HELOCs were unchanged from the previous week, with the rate for a $30,000 HELOC at 6.51% and rates for similar home equity loans around 7% , according to a survey by Bankrate, which, like NextAdvisor, is owned by Red Ventures.
That’s good news for consumers looking to get a loan before rates spike, but the calm might not last too long.
The lack of movement shows how home equity rates often move in concert with increases in benchmarks, largely the prime rate, which itself moves in tandem with the Federal Reserve’s changes to its prime rate. short-term interest. The Fed’s last rate change was the last week of July, and while rates moved after that central bank action, they’ve changed little since.
As for the prospect of future rate changes by the Federal Reserve, the July meeting minutes, released Wednesday, pointed to likely future rate hikes until inflation, which is higher than it has been in 40 years but slowed to 8.5% year-on-year in July, was on track to fall to 2%.
The next Federal Reserve meeting is in September.
Home equity lending is booming due to a dramatic increase in home values over the past two years. A investigation commissioned by reverse mortgage lender Finance of America Reverse found that while 86% of respondents said the value of their home had increased since buying it, only 28% said they were likely to contract a home equity loan in the future. Those who are unlikely to do so highlighted a lack of interest or need and did not want to take on more debt.
Here are the average rates as of August 18, 2022:
|Type of loan||Price for this week||Last week’s rate||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?
The difference between what you owe on mortgages and other home loans is called equity. With a home equity loan or HELOC, you use it as collateral to borrow money. Here’s how they work:
Home Equity Loans involve borrowing a lump sum of cash and paying it back with fixed payments over a number of years at a certain, usually fixed, interest rate.
HELOC are a bit like credit cards, in that the bank gives you a limit on how much you can borrow at one time – a line of credit – and you only pay interest on what you borrow. The interest rate is often variable, changing over time with the market, usually based on a benchmark such as the preferential rate.
Home equity loan and HELOC interest rates are expected to continue to rise through the remainder of 2022. preferential rate, which is the benchmark for many HELOCs, tends to follow 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. For home equity loans, rates are also expected to continue to climb as banks’ borrowing costs increase, experts say.
Homeowners have more equity than ever
Largely because of the 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, 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.
Similar findings were made by Black Knight, a mortgage data and technology company, in a report that showed Total usable equity of U.S. owners — something they could borrow against while retaining 20% — hit a new record 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 sharp increases in mortgage rates this year, which have made cash refinances less attractive. Cash-out refis made more sense when mortgage rates were at record highs, but rates have risen more than two percentage points since the start of the year, and it doesn’t make much sense to take a much worse rate on your mortgage just to get the money.
When deciding between a home equity loan and a cash refinance, think about all the money affected by a change. A refinance may have a lower interest rate than a home equity loan, but you would also change the rate on your outstanding mortgage balance, which could have a much greater financial impact.
There are risks with home equity loans
Since home equity loans and HELOCs are secured by your home, if you don’t pay them back, the bank can foreclose. Plus, just because your home’s value has gone up doesn’t mean it’ll 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 home renovations, which can be expensive, but can increase the value of your home when complete. Experts warn against using them to finance a more expensive lifestyle or for debt consolidation.