Key points to remember
- Home equity loan and line of credit rates were essentially unchanged this week.
- Rates tend to move more significantly following rate hikes by the Federal Reserve. The Fed is expected to do so later this month.
- While the number is still large, falling home prices mean buyers have less equity in their homes than before.
The recent slowdown and falling house prices mean homeowners could end up with slightly less equity than they had a few months ago – although it’s still more than enough to drive demand Continuing Home Equity Loans and Lines of Credit (HELOC).
Workable equity — the amount an owner can borrow against while maintaining a 20% stake — hit a record in the second quarter of the year, but peaked in May, falling 5% in June and July, according to the mortgage technology and data company. Black Knight.
In some large West Coast markets, where prices were much higher, exploitable equity has shrunk even further.
The culprit is a monthly drop in home prices as slowing demand — caused by rising mortgage rates pushing buyers out of the market — begins to drive prices down. Home prices are still up 14% year over year, but are down from May highs. “Without granular, timely data, market trends only become apparent when they’re right in front of you – like a sudden shift to the biggest monthly decline in house prices in more than a decade,” Ben Graboske, president of the data and analysis for Black Knight, said in a statement.
The good news is that high home values mean the market is well positioned to weather falling prices without causing problems like those seen during the financial crisis of the late 2000s. Black Knight said that if every home was down 5% in value, less than 1% would be underwater – meaning the total value of loans secured by home equity exceeded value – the vast majority being those purchased over the past last months.
Homeowners have increasingly turned to home equity loans instead of cash refinances, Black Knight reported. Home equity loans were up nearly 30% quarter over quarter, while cash remittances fell 30% due to soaring mortgage rates.
Here are the average home equity loan and HELOC rates as of September 7, 2022:
|Type of loan||Price for this week||Last week’s price||Difference|
|$30,000 HELOC||6.51%||6.53%||– 0.02|
|10-year $30,000 home equity loan||7.06%||7.05%||+0.01|
|Home equity loan of $30,000 over 15 years||7.01%||6.99%||+ 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 is the difference between home equity loans and HELOCs?
Home equity loans and HELOCs are loan products where you use the value of your home beyond what you owe on mortgages and other home loans as collateral. There are a few differences between them:
Home Equity Loans involve borrowing a lump sum of money and paying it back in installments, usually at a fixed interest rate.
HELOC look more like credit cards. You have a limit on how much you can borrow at one time and you only pay interest on what you borrow. The rate tends to be variable, often based on a benchmark like the prime rate.
Experts expect interest rates for home equity loans and HELOCs to rise through the end 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 has raised its rate four times so far, most recently at the end of July, and is expected to continue to do so through the end of the year, including later this month. For home equity loans, rates are also expected to continue to climb as banks’ borrowing costs increase.
Home equity loans can be risky
Home equity loans and HELOCs are secured by your home. This means that if you don’t pay them back, the bank can put you in foreclosure. Note that just because the value of your home has gone up doesn’t mean it will stay there forever. Real estate values are starting to drop a bit. Your local market might even see prices drop as national averages rise.
Don’t use a home equity loan or HELOC for just anything. They tend to be used for home renovations, which can be expensive, but can simultaneously increase the value of your home. Experts warn against using them to finance a more expensive lifestyle or for debt consolidation.
“I wouldn’t necessarily recommend turning unsecured debt or credit card debt into secured debt,” Leslie Tayne, founder and chief counsel of Tayne Law Group, told us. “You wouldn’t lose your home to credit card debt, but you could lose your home if you default on a HELOC.”
Experts advise against using a home equity loan for debt consolidation. Turning high-interest unsecured debt, like credit card debt, into debt secured by your home could be risky if you’re still struggling to pay it all back.