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Home equity loan rates saw only modest changes this week as reports offered signs that the high inflation that has dominated headlines over the economy this year may be starting to cool.

Average rates on home equity loans and lines of credit (HELOCs) increased slightly, but nowhere near the significant increase seen for HELOCs last week. That move came as lenders factored in a hike in the Federal Reserve’s short-term benchmark rate as part of an ongoing campaign to rein in high inflation.

There was some positive news on the inflation front this week, as the Consumer’s price index showed inflation of 8.5% year-on-year in July, down from 9.1% in June.

Inflation plays a role in what happens to home equity loans and HELOC rates. HELOCs with a variable rate linked to an index often move somewhat in step with changes made by the Fed, and the more persistent inflation is, the more likely the Fed will keep raising its rate. Home equity loans have rates that are set more on the lender’s cost of borrowing money, which is influenced by the Federal Reserve and inflation, among other factors.

These are the average rates as of August 11, 2022:

type of loan This week’s rate Last week’s rate Difference
$30,000 HELOC 6.51% 6.38% + 0.13
$30,000 10-year home equity loan 7.05% 6.91% + 0.14
$30,000 15-year home equity loan 6.99% 6.92% + 0.07
Source: Bankrate

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 top 10 US markets.

How are Home Equity Loans and HELOCs different?

When your home is worth more than you owe on mortgages and other home loans, that difference is called equity. With a home equity loan, or HELOC, you use that cash as collateral to borrow money. Home Equity Loans and HELOCs work differently:

Home Equity Loans These are installment loans in which you borrow a lump sum of cash up front and pay it back with fixed payments over a set number of years at a set interest rate.

HELOC They are more like credit cards, in that the bank gives you a limit on how much you can borrow at one time, a line of credit, paying interest only on what you borrow. The interest rate is often variable, meaning it will change over time with the market, usually based on a benchmark such as the prime interest rate.

Interest rates for home equity loans and HELOCs are expected to continue to rise through the rest of 2022. Many HELOCs base their variable rate on the prime interest rate, which tends to track increases in short-term interest rates by the Federal Reserve. So far, the Fed has raised that benchmark rate four times, most recently in late July. For home equity loans, rates are likely to continue to rise as banks’ borrowing costs rise.

Homeowners have never had more equity

Thanks in large part to a dramatic rise in home prices in recent years, American homeowners have never had more capital to borrow. ATTOM, a real estate data firm, reported that in the second quarter of 2022, nearly half of residential mortgaged properties were considered “equity-rich” which means that mortgages and other mortgage loans do not cover more than half of their value.

A similar report from Black Knight, a mortgage technology and data company, showed that total amount of usable capital of US owners – against what they could borrow while still holding 20% ​​– hit a new record of $11.5 trillion in the second quarter, but that growth has slowed as price growth cools.

Consumers looking to tap into that equity are turning more to home equity products this year as dramatic increases in mortgage rates have made cash-out refinances less attractive. Cash-out refinances were popular when mortgage rates were at record lows, but mortgage rates have risen more than two percentage points since the start of the year, making it much less likely that consumers will want to accept a worse rate. on your mortgage just to get something. money.

Home Equity Loans and HELOCs Can Be Risky

Like a mortgage, home equity loans and HELOCs are secured against your home. If you don’t pay it back, the bank can take your house. It’s also important to understand that just because your home has increased in value doesn’t mean it will stay there forever. Real estate values ​​may fall. Your local market could even see prices fall while national averages rise.

That added risk means you shouldn’t use a home equity loan or HELOC for anything. They are most commonly used for major home renovations, which can come with a hefty price tag, but often add to the value of your home when they’re done. Experts warn against using it to finance a more expensive lifestyle or for debt consolidation.

pro tip

A home equity loan or HELOC is usually a good and relatively cheap way to borrow money, but the risk it imposes on your home means you have to be careful how you use it. Experts advise against using a HELOC to finance a more expensive lifestyle.

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