Home equity loan and line of credit (HELOC) rates only moved a little bit this week, but high inflation could signal further increases in the future.
The Bureau of Labor Statistics this week reported the Consumer Price Index, a key measure of inflation, was 9.1% year-over-year in June, the highest since 1981. That high inflation figure could push the Federal Reserve to raise its benchmark short-term interest rate by more than previously expected at its meeting at the end of July. Fed Governor Christopher Waller indicated in a speech Thursday that he would support a 75 basis point increase at the next meeting.
The next Fed rate hike will directly affect HELOCs with a variable rate that tracks an index like the prime rate, which follows the Fed changes directly. It would also increase the cost of borrowing for banks, which could increase the rates on fixed-rate home equity loans.
Some experts say signs indicate inflation is already starting to relax a bit. “There are signs that some of the main drivers of inflation are easing, such as lower oil and other commodity prices in July, slower wage growth, and declining supply chain pressures,” Dawit Kebede, senior economist for the Credit Union National Association, said in a statement. “However, service price increases led by housing and pent-up demand for vehicles will keep inflation elevated in the coming months.”
Here are the average rates as of July 14, 2022:
|Loan Type||This Week’s Rate||Last Week’s Rate||Difference|
|10-year, $30,000 home equity loan||6.88%||6.86%||0.02|
|15-year, $30,000 home equity loan||6.90%||6.85%||0.05|
How These Rates Are Calculated
These rates come from a survey conducted by Bankrate, which like NextAdvisor is owned by Red Ventures. The averages are determined from a survey of the top 10 banks in the top 10 US markets.
What Are Home Equity Loans and HELOCs?
When your home’s value 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 use the equity as collateral to borrow money, often to fund home improvement projects or other major expenses.
Home equity loans and HELOCs work differently:
Home equity loans function similarly to a fixed-rate mortgage, in which you borrow a lump sum of cash up front and pay it back in installments over a set number of years at a set interest rate.
HELOCs function a bit more like credit cards, in that the bank gives you a maximum amount you can borrow at once during a draw period – a line of credit – and you can take out some, pay it back, and borrow more until the draw period ends. You’ll pay interest only on what you borrow. The interest rate is usually variable, meaning it will change over time with what the going rate is, usually based on a benchmark like the prime rate published by the Wall Street Journal.
Home equity loans and HELOCs are great for some uses, but not for everything. Experts caution against risking your home to borrow money for unnecessary expenses.
How Are Home Equity Loans and HELOC Rates Changing?
Interest rates for home equity loans and HELOCs are expected to climb through the end of 2022. Many HELOCs base their variable rate on the prime rate, which tends to track increases in short-term interest rates by the Federal Reserve. The Fed is expected to keep raising its benchmark rate to combat high inflation. For home equity loans, rates are set based on the lender’s cost to borrow money, which is also affected by Fed changes, among other factors.
Consumers are increasing turning to home equity products due in part to the recent dramatic increases in mortgage rates, which have made cash-out refinances less attractive. Cash-out refis were popular in recent years as mortgage rates were at record lows and home prices increased, but mortgage rates have risen more than two percentage points since the start of the year, making consumers far less likely to want to take on a significantly worse mortgage rate just to get some cash.
What Are the Risks of Home Equity Loans and HELOCs?
Like a mortgage, home equity loans and HELOCs are secured against your home. That means if you don’t pay it back, the bank can take your house. Be careful when you borrow. “If it’s not a need and it’s just some sort of desire or want, you should really ask yourself: Is this something that is wise?” Linda Sherrydirector of national priorities for Consumer Action, a national advocacy group, told us.
Home equity products aren’t the best choice for everything. HELOCs, for example, are particularly good for home renovation projects, but you likely don’t want to take on the risk involved just to get cash for a vacation or to invest in the stock market.
If you understand the risks and know you can pay the money back, home equity loans and HELOCs can provide lower interest rates than other types of borrowing. Experts say it’s wise to be careful with any kind of borrowing, and do it only in situations where you’re confident you’ll have the cash in the future to repay.
How Does the Housing Market Affect My Home Equity?
Many homeowners have more equity in their homes now because of the big run-up in housing prices in the past two years. The median home listing price was $450,000 in June, up 38.5% compared to June 2019, according to Realtor.com. Higher mortgage rates have slowed down the pace of home sales, experts tell us, but prices are unlikely to come down in any significant way nationwide.
Homes are worth a lot more than they were two or three years ago, and homeowners didn’t have to do anything to earn that added equity. That provides more flexibility to take out loans or lines of credit against home equity, if you understand the risks.
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