The average home equity line of credit rate is much higher today than it was a week ago.
Blame the Federal Reserve for part of the 1.38 percentage point jump to 6.38%, but not all of it.
The Fed’s decision last week to raise its benchmark short-term interest rate by 75 basis points played a direct role in the HELOC rate hike, as many have a floating rate tied to a standard like the prime rate, which directly tracks Fed changes. , says Greg McBride, chief financial analyst at Bankrate, which, like NextAdvisor, is owned by Red Ventures.
But much of the sharp increase this week is due to the expiration of promotional rates for several lenders, McBride said. As the prime rate and lenders’ borrowing costs rise, HELOC rates will continue to rise.
The big rate change comes as new data shows nearly half of homes with a mortgage are “equity rich,” meaning their available equity is equal to or greater than what is owed on the mortgage and other loans.
Borrowers should keep an eye on what’s expected for home equity loans as rates move quickly, says Michael Pugh, president and CEO of Carver Federal Savings Bank.
“We might expect to see some borrowers deciding whether or not they haven’t locked in their interest rates, whether they can actually afford the house they wanted to buy, or afford the home loan they want. ‘they were asking’, he says.
Homeowners considering leveraging their home equity for a major project need to understand, as rates change rapidly, their options for fixed rate products such as most home equity loans and fixed rate products. variable rate like most home equity lines of credit. Home equity loan rates, which do not directly track Fed changes, were virtually the same this week as they were last week.
Here are the average rates as of August 4, 2022:
|Type of loan||Price for this week||Last week’s price||Difference|
|$30,000 HELOC||6.38%||5.00%||+ 1.38|
|10-year $30,000 home equity loan||6.91%||6.91%||No change|
|Home equity loan of $30,000 over 15 years||6.92%||6.91%||+0.01|
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?
When the value of your home is more than what you owe on mortgages and other home loans, that difference is called equity. With a home equity loan, or HELOC, you borrow money with that equity as collateral, often to fund home improvement projects or other major expenses.
Home equity loans and HELOCs work differently:
Home Equity Loans are installment loans similar to a fixed rate mortgage, in which you borrow a lump sum of money up front and repay it with fixed payments over a set number of years at a set interest rate.
HELOC are more like credit cards, in that the bank gives you an amount that you can borrow during a drawdown period — a line of credit — and you can withdraw, repay, and borrow more, up to that limit, until draw period ends. You will only pay interest on what you borrow. The interest rate is often variable, meaning it will change over time depending on the prevailing rate, usually based on a benchmark like the prime rate.
Owners have record net worth
A pair of recent reports highlight how American homeowners have far more equity today than they did in the recent past, thanks in large part to a dramatic increase in home prices over the past two years. ATTOM, a real estate data company, reported that in the second quarter of 2022, almost half of mortgaged residential properties were considered “equity-rich”, meaning that mortgages and other home loans covered no more than half their value.
A similar report from Black Knight, a mortgage data and technology company, showed that the total amount of US homeowners’ workable equity – what they could borrow against while still retaining 20% - hit a new record high of 11, $5 trillion in the second quarter, but that growth slowed as price growth slowed.
“As home price appreciation appears to be slowing due to rising interest rates on mortgages, it seems likely that homeowners will continue to rely on the record amount of equity they have available for the remainder of 2022,” Rick Sharga, executive vice president of market intelligence at ATTOM, said in a statement.
Rising house prices mean that around half of homeowners with mortgages are now ‘stock rich’, but be careful not to overstretch yourself financially with risky borrowing on your home.
What affects home equity loan and HELOC rates?
Interest rates for home equity loans and HELOCs are expected to continue to rise through the end of 2022. Many HELOCs base their variable rate on the prime rate published by the Wall Street Journal, which tends to track increases in short-term interest rates by the federal government. Reserve. So far, the Fed has raised this benchmark rate four times, the most recent being in late July. The Fed should continue to raise this rate to combat high inflation. For home equity loans, rates are also expected to continue to climb as banks’ borrowing costs increase.
Consumers are increasingly turning to home equity products, in part because of recent dramatic increases in mortgage rates, which have made cash refinances less attractive. Withdrawal refis were popular in recent years as mortgage rates were at record lows and home prices rose, but mortgage rates have risen more than two percentage points since the start of the year, making consumers much less likely to want to take on a significant share. worst mortgage rate just to get cash.
Experts also say you should keep an eye out for more than the rate of these loan products. They often come with fees, which can make a product with a lower rate cost you more.
There are risks with home equity loans and HELOCs
Like a mortgage, home equity loans and HELOCs are secured by your home. If you don’t repay, the bank can repossess your house. It’s also important to understand that just because the value of your home has gone up doesn’t mean it will stay there forever. Real estate values can drop. Your local market might even see prices drop as national averages rise.
“I think you have to look at the situation as if the amount you could sell your house for might go down in the future and you don’t want to borrow too much because at closing you would have to repay an unusually large sum. “, told us Linda Sherry, director of national priorities for Consumer Action, a national advocacy group. “You could find yourself underwater in a very bad scenario, where you owe more at the fence than you have. actually been able to sell the house.”