Key points to remember
- Home equity loan and HELOC rates remained relatively stable last week, increasing only slightly.
- The Federal Reserve raised its main short-term interest rate by 75 basis points, which will push up the cost of borrowing.
- Higher interest rates for home equity products will likely make it harder to qualify in coming months
- Experts had expected a slowdown in planned home improvement projects as rates continue to rise.
Inflation has not blinked and neither has the Federal Reserve. But homeowners looking to tap into their home’s equity just might.
The Fed announced last week a 75 basis point increase in its benchmark short-term interest rate, the federal funds rate.
A higher federal funds rate will mean higher rates for consumer loans. As a result, borrowing with a home equity loan or line of credit (HELOC) will cost more.
This isn’t just the case for borrowers looking to take out a home equity loan or HELOC. If you have an existing HELOC, you can expect your monthly payments to increase due to today’s rate hike. HELOCs often have variable interest rates, making them vulnerable to Fed rate hikes.
Higher interest rates for home equity products will also make it harder to qualify. “The home equity product is still great. So if you can get one now, I recommend you do because things are only going to get worse. You might not be eligible for it in six months,” says Vikram Gupta, executive vice president and head of home equity at PNC Bank. “Lenders are going to become more careful about who they lend to – only choosing borrowers with high credit scores and stable jobs.”
High levels of consumer spending are fanning the flames of inflation, which was 8.2% year-on-year in September. While owners are sitting on record amounts of equity, the Fed doesn’t want them to dip into it. Aggressive rate hikes are the Fed’s way of pouring buckets of cold water on inflation.
“They want people to sit back, tighten their belts and put these things off,” Karl Wagner, a partner at Biondo Investment Advisors, previously told us.
The average rate for a $30,000 HELOC was essentially flat at 7.32%. Home equity loan rates increased slightly.
Here are the average home equity loan and HELOC rates as of November 2, 2022:
|Type of loan||Price for this week||Last week’s rate||Difference|
|$30,000 HELOC||7.32%||7.30%||+ 0.02|
|10-year $30,000 home equity loan||7.57%||7.51%||+0.06|
|Home equity loan of $30,000 over 15 years||7.49%||7.41%||+0.08|
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 secured loans, which means you use the difference between the value of your home and what you owe on your mortgage as collateral. In the event of default, you risk losing your accommodation. However, since the loan is secured by your home, you will likely be able to get a lower rate than a personal loan.
They differ in how you borrow.
Home Equity Loans provide you with a single lump sum cash payment that you will repay over a set period of time. Since home equity loans usually have a fixed interest rate, your monthly payments won’t be affected even if the Fed continues to aggressively raise rates.
In contrast, HELOC usually have variable interest rates. Although you’ll only pay interest on what you’ve borrowed, that payment will generally move in line with the federal funds rate — which is up after today’s meeting. When you borrow with a HELOC, you have access to a revolving line of credit. It’s up to you when you want to mine it, but there are limits to what you can withdraw at any given time.
What does the Federal Reserve mean for home equity loans and HELOCs?
Today’s announcement marks the Fed’s fourth straight increase of 75 basis points in 2022.
“The Fed won’t stop until it sees consumer spending slow and inflation subside,” Wagner said. “There is a chance they will overshoot the market a bit, but that’s a risk I’d rather they take. If the Fed doesn’t do enough, inflation will spiral out of control.
Fed rate hikes are meant to discourage spending and encourage saving. Savings account and CD interest rates have risen with each Fed increase.
Homeowners have been in the midst of a tug of war between record amounts of home equity and the increased cost of operating it. After today’s rate hike, “home equity burning a hole in consumers’ pockets” will lose some of its appeal, says Jacob Channel, senior economist at LendingTree.
Although interest in home equity products has been strong for most of the year, that should change. A recent study by Harvard University’s Joint Center for Housing Studies predicts a “sharp slowdown” in home improvement projects through 2023.
“The American economy is like a big aircraft carrier. He doesn’t react so quickly. We will have to wait a few months to see the impacts of Fed actions ripple through the system,” Gupta says. “But as the cost of borrowing continues to rise, at some point there has to be a slowdown in demand.”
How to Get a Home Equity Loan or HELOC
Obtaining home equity financing is a fairly simple process, but one worth your due diligence.
“Remember that a home equity loan, as the name suggests, is something you have to pay back. So don’t let dollar signs cloud your judgement,” Channel says.
Consider how a monthly payment will fit into your budget. Money may already be tight due to inflation, so think about how you can balance another monthly payment.
Be careful if you are dealing with a fixed or variable interest rate. Ask yourself if you will be able to afford the monthly payment if the rates go up.
Experts recommend shopping around to see who offers the best rate.
A home equity loan or HELOC carries one major risk: losing your home. Having a structured repayment plan along with an adequate emergency fund will help protect your greatest asset.
Whether you have an existing HELOC or are looking to open one, keep an eye on pricing. Fed rate hikes have a more direct impact on HELOC interest rates, which often have floating rates.
How to Use Home Equity
As long as you are confident in your repayment plan, the potential uses for home equity loans and HELOCs are endless. By and large, however, homeowners use them to improve their homes or consolidate their debts.
However, experts recommend against dipping into your home equity just because you can. Having a clear goal and objective is crucial.
“I hope the days of using your home as an ATM are over,” says Jon Giles, head of consumer direct lending at TD Bank.