Home equity loans and lines of credit (HELOCs) are back.
With mortgage rates below 4% for the past two years, it made a lot of sense to refinance your mortgage and get some money out that way if you wanted to turn some of the equity in your home into cash.
Now the average interest rate on a 30-year fixed-rate mortgage is over 5%, and experts say there’s no longer any point in ruining what good interest rate you might have on your principal loan to do a payoff refinance. “Why do you want to disturb that? You wouldn’t,” he says Jim AlbertelliCEO of Voxtur Analytics, a real estate technology company.
Instead, there are other ways to access the equity built up in-house. “What you want to do is use some of that equity in your home and do it through a [home equity loan] or a home equity line of credit and use that for home improvement or whatever,” says Albertelli.
Home equity loans and lines of credit (HELOCs) are often referred to as second mortgages because you are borrowing against the value of your home that is not covered by your first mortgage. They haven’t been popular in years, partly due to low mortgage rates and partly because of the loose lending practices that helped trigger this Foreclosure crisis 15 years ago. But mortgage rates aren’t as low and home lending is now much more tightly regulated, prompting a resurgence, experts say. Rob CookVice president of marketing, digital and analytics at Discover Home Loans says the market is up about 50% year over year.
“This product has been unloved for 15 years,” he says Vikram Gupta, Head of Home Equity at PNC Bank. “Is it now the return of home equity?”
Make sure you get a good price on these products if you plan to take advantage of them. Here’s what four experts predict about equity and HELOCs for 2022.
Experts forecast home equity interest rates and HELOC through 2022
Vikram GuptaHead of Home Equity at PNC Bank
For HELOCs, the floating rate typically follows the policy rate, which follows changes in short-term interest rates by the Federal Reserve, Gupta says. “That part of the equation, interest rates are going to go up. It’s a variable rate. We are in an environment of rising interest rates. It is tied to an index that is going up, so the price will go up.”
Jim AlbertelliCEO of Voxtur Analytics, a real estate technology company
Expect home equity rates to end up being slightly higher than the rate on 30-year fixed-rate mortgages, says Albertelli. “You can count on your home equity line of credit or [home equity loan] somewhere in the 6.5% to 8% range as we move towards the end of this year and into next year.”
Rob KochVice President of Marketing, Digital and Analytics at Discover Home Loans
Home yields may mirror the uptick in mortgage rates, but fears of a recession could dampen those increases, Cook says. “My outlook is that rates will either flatten or trend higher over the course of this year.”
Mark HinshawCo-Founder and President of Candor Technology, a mortgage technology company
Home yields could rise 50 to 100 basis points this year, Hinshaw says. “The Prime Minister [rate] will keep up with the rate hikes the Fed issues.”
Home equity vs. HELOC
Home equity loans are typically broken down into two products that work differently. The first is a traditional home equity loan – you borrow a certain amount of cash in one lump sum and then pay it back in monthly payments, similar to a fixed-rate mortgage. The second is a home equity line of credit, or HELOC, where the lender approves you for a certain amount of credit and you can borrow up to that limit at a time you need it, paying only interest on the money you borrow. Like a credit card secured by your house.
When choosing between a home equity loan and a HELOC, consider how quickly you need the money and whether you need it all at once. If you don’t need everything at once, a HELOC might be a better deal.
How do you decide? It has to do with your personal financial situation and what you want to use the money for, he says Mark HinshawCo-Founder and President of Candor Technology, a mortgage technology company.
A HELOC makes more sense if you’re not yet sure what you’re going to spend the money on, or don’t plan on spending it right away, Hinshaw says. In this situation, if you’ve opted for a home equity loan instead of a HELOC, you’ve got the money on the table and you’re paying interest on cash that’s not yet being used.
A home equity loan makes more sense when the need is immediate and you know exactly what to pay, he says. “Let’s say you want to renovate your home, there is a certain amount you want to spend, you are not interested in spending money on other things and you are more conservative and risk averse when it comes to interest rates, then interest would I say that the loan would be the better way for you.”
How are home equity and HELOC interest rates determined?
HELOC sets are fairly simple in that they typically have two components: a variable part that moves with an index, usually the policy rate published by the Wall Street Journal, and a margin added (or subtracted) by the lender, which does not change. For example, it could be the federal funds rate plus 75 basis points or two percentage points, Gupta says. With interest rates at 4% in early June, that would mean a HELOC rate of 4.75% with a margin of 75 points for the bank.
For example, according to a survey by Bankrate, which like NextAdvisor is owned by Red Ventures, the average rate for a $30,000 HELOC on June 1, 2022 was 4.35%.
As a fixed income product, home equity interest rates are set more like mortgage rates, with a variety of factors going into them. That includes the cost for the bank to get the money, the lender’s operating costs, its profits, and a margin to cover the risk that you, the borrower, won’t repay it, Hinshaw says. Compared to a variable rate HELOC, a fixed rate loan “ends up being a little more expensive because you’re taking on interest rate risk,” he says.
The average interest rate on a $30,000 10-year home equity loan on June 1, 2022 was 6.73% per bank rate.
Why Consider a Home Equity Loan or HELOC?
Homeowners who have built up a lot of equity and need cash can use these tools to borrow at an interest rate that is typically significantly lower than unsecured debt like personal loans and credit cards.
“It allows people to keep the low interest rate they have on their main mortgage,” says Cook. “It’s a good financial vehicle from that perspective.”
Such borrowing can help consumers get the home they want in a market that is not conducive to moving. Buying a new home can be a hassle right now as prices are sky high and homes are only days on the market in many parts of the country. “For many consumers, it makes sense to stay where you are in your current home and try to improve it,” says Albertelli.
Risks of Borrowing Against Your Home
Like a mortgage, and unlike credit cards or personal loans, there is one major risk with home equity loans and HELOCs: you could lose your home. “Anytime you use your home as collateral and ultimately don’t pay, there’s a risk of foreclosure,” says Cook.
That risk is why interest rates on debt secured by your home are lower than unsecured debt, Gupta says. Lenders have an opportunity to recoup their losses by taking your home and selling it if you don’t pay. “That risk remains wherever you use your home, but when used wisely and judiciously, it’s a more cost-effective option than unsecured borrowing,” he says.
Knowing this risk, you should be careful what you do with home equity loans and lines of credit. Experts advise that it’s usually best to rent for everyday necessities and things like essential home improvement items that add value to your home.
As for the risk of borrowing too much and not being able to pay it back, experts say you should keep a cushion of equity untied by debt and work with lenders who will carefully review your loan. Home equity loans caused problems 15 years ago, but regulations have tightened and banks should no longer lend arbitrarily. “Even if the borrower wanted more, lenders will have severe restrictions,” Gupta says.