Home equity loan and HELOC rates had another ho-hum week of small rate changes, with averages moving up a bit in early July.
This contrasts with the wide swings seen in mortgage interest rates, where averages saw one-week increases of almost half a percentage point and, this week, a decline of 30 basis points.
What is behind the differences in rate movement for products, which to consumers may look very similar in that they are all loans taken out on the property? It has to do with how lenders decide what to charge, says Greg McBride, chief financial analyst at Bankrate, which, like NextAdvisor, is owned by Red Ventures.
“Mortgage rates are driven by investors in the secondary market,” McBride says. “Home equity rates are based on the lender’s cost of funds and the risk of being in a second lien position.”
While this week’s changes for home equity loans were negligible — just a few basis points, they were essentially flat — McBride notes that they’ve changed a lot since January. “Average home equity loan rates have risen quite substantially since the start of the year, up [more than 75 basis points],” he says. “Of course, it has nothing to do with what we’ve seen in mortgage rates, but those are apples and oranges.”
Experts expect rates to continue to rise throughout the year as banks’ cost of borrowing rises.
Here are the average prices as of July 6, 2022:
|Type of loan||Price for this week||Last week’s price||Difference|
|10-year $30,000 home equity loan||6.86%||6.83%||0.03|
|Home equity loan of $30,000 over 15 years||6.85%||6.83%||0.02|
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 factors affect 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 preferential rate published by the Wall Street Journal, which tends to follow increases in short-term interest rates by the Federal Reserve. Observers expect the Fed to continue raising its benchmark 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.
In addition to comparing home equity loan and HELOC interest rates, review the fees of each. This can make a product with a higher interest rate more attractive.
What is the difference between a home equity loan and a HELOC?
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 work similarly to a fixed rate mortgage, where you borrow a lump sum of money up front and pay it back in installments over a set number of years at a set interest rate.
HELOC are more like credit cards, in that the bank gives you a maximum amount that you can borrow at one time during a drawdown period – a line of credit – and you can withdraw from it, pay it back, and borrow more up to at the end of the draw period. 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 preferential rate.
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 pay back an unusually large sum,” Linda Sherry, director of national priorities for Consumer Action, a national advocacy group, told us. “You could find yourself underwater in a really bad scenario, where you owe more at closing than you were actually able to sell the house for.”
How does the housing market affect my home equity?
Many homeowners now have more equity in their homes due to the sharp rise in house prices over the past two years. The median home listing price was $450,000 in June, a 38.5% increase from June 2019, according to Realtor.com. Rising mortgage rates have slowed the pace of home sales, experts tell us, but prices are unlikely to fall significantly nationwide.
This rapid appreciation means your home is worth a lot more than it was two or three years ago, and you haven’t had to do anything to earn that extra equity. This gives you more flexibility to take out loans or lines of credit against your home equity, if you understand the risks.