Average HELOC and Home Equity Loan Rates for the week of October 3, 2022

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Key points to remember:

  • The average interest rate for a home equity line of credit rose significantly this week after changes made by the Federal Reserve.
  • The Fed last week announced a third consecutive 75 basis point increase in its key rate, which is a factor in how lenders set rates.
  • The Fed rate has a more direct impact on HELOCs, which often have floating rates tied to an index that tracks the rate.
  • Home equity loan rates, which aren’t as directly affected by the Fed’s changes, were little changed.

Home equity borrowers are beginning to feel the effects of the Federal Reserve’s latest rate hike.

Average home equity lines of credit (HELOC) rates jumped last week in response to Fed changes, while home equity loan rates barely budged.

The Fed rate hike has a more direct impact on HELOCs. They tend to have variable rates linked to an index like the prime rate, which moves in parallel with the federal funds rate.

“What you’ll likely see is that home equity line of credit rates for many institutions will see an immediate change in their rates based on the 75 basis point increase,” says Mike Shepard, vice -Senior President, Direct Consumer Credit at US Bank. “It may be delayed for a few days depending on the indexes used by individual institutions.”

Home equity loans, which tend to have fixed rates, will also likely see increases following the Fed’s changes, although in a less direct way. “It’s harder to predict what’s going to happen with home equity loan rates because there are a lot of things that come into play,” Shepard says.

Despite rate increases, home equity loans and HELOCs are gaining popularity due to the dramatic rise in mortgage rates this year. The average 30-year fixed mortgage rate has doubled over the past year and is now north of 6%. When these rates were low, homeowners who wanted to borrow money against the value of their home used cash refinancing. Higher mortgage rates change the math.

“The consumer can get that extra $50,000 through a home equity loan or home equity line of credit at a higher rate than their first mortgage, but they also don’t reassess their existing mortgage balance in a cash refill. Shepard says. “That’s why we think home equity is starting to become a bigger part of how consumers plan to fund those larger ticket purchases over the next few years.”

Here are the average home equity loan and HELOC rates as of September 28, 2022:

Type of loan Price for this week Last week’s price Difference
$30,000 HELOC 7.12% 6.75% +0.37
10-year $30,000 home equity loan 7.16% 7.15% +0.01
Home equity loan of $30,000 over 15 years 7.13% 7.12% +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 you borrow money with home equity loans and HELOCs, you use the difference between the value of your home and what you owe on mortgages and other home loans as collateral. Here’s how these two products work:

With a home equity loanyou borrow a certain amount of money at once and repay it over time, usually at a fixed interest rate.

HELOC are more like credit cards. You have a limit on how much you can withdraw at one time and you only pay interest on what has been borrowed. The interest rate is often variable, usually based on a benchmark such as the prime rate.

Lending experts expect interest rates for home equity loans and HELOCs to rise through the rest of 2022. The prime rate, which is the benchmark for many HELOCs, often follows increases in mortgage rates. short-term interest by the Federal Reserve. The Fed should continue to raise its key rate until the end of the year. For home equity loans, rates are also expected to continue to climb as banks’ borrowing costs increase.

When deciding between a home equity loan and a HELOC, an important consideration is your comfort with rising interest rates. With a variable rate product, whether it’s a HELOC or a loan, you’ll likely see higher rates in the near future. A fixed rate product will likely have a higher overall rate, but will be less sensitive to market changes. “Are you comfortable with the rate increase or not?” Shepard said.

Pro tip

With interest rates rising, consider your appetite for higher rates — and higher payments — when choosing between a home equity loan and a HELOC. A home equity loan will come with more consistent payments.

How should you use home equity loans and HELOCs?

A big difference is that a mortgage is almost always used to pay for a house. With a home equity loan or a HELOC, you can use the money for almost anything you want. But should you?

The most popular use is for large home improvement projects, which can incur a significant upfront cost. Many borrowers resorted to cash refinances in recent years when mortgage rates were low, Shepard says. But with mortgage rates soaring, home equity loans and HELOCs are becoming the more attractive option.

“When the day is over, the consumer needs to be able to look at their financial situation and say whether this investment I’m going to make in my home is something I can afford,” Shepard says.

Home equity loans are sometimes used to consolidate higher interest debt, such as credit cards, which also become more expensive when the Fed raises rates. Experts say you need to be careful when turning unsecured debt, like credit card debt, into something secured by your home because you could lose your home if you can’t pay it off.

The important thing is not to borrow money just because of changes in the economic environment. Now might be a good time to take out a fixed rate home loan, for example, because rates will go up, but that’s not a good enough reason to borrow. “Don’t act just because rates go up,” Shepard says. “Take action because it’s the right thing to do for your financial situation.”

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