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The Average HELOC Rate Hit 5% Ahead Of The Federal Reserve’s Next Rate Hike

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The Average HELOC Rate Hit 5% Ahead Of The Federal Reserve’s Next Rate Hike

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Home equity loan and HELOC rates moved very little this week, with the average loan rate approaching 7% and the average HELOC rate hitting 5%

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Rates are expected to see some effects from action next week by the Federal Reserve. The central bank is expected to raise its benchmark short-term interest rate, likely by 75 basis points, to combat persistently high inflation. That will directly affect HELOCs with a variable rate that tracks an index, like the prime rate, which follows those changes. It will also raise the cost of borrowing for banks, pushing up rates for home equity loans.

Despite those rising rates, the surge in mortgage rates this year has led to a resurgence of home equity loans and HELOCs, as higher mortgage rates cut the demand for cash-out refinances. Also behind the surge is the increasing popularity of home remodeling, pushed by pandemic-driven remote work and rising home equity from higher home prices.

The growth in spending on home renovations is expected to slow down a bit going into next year, although it will likely remain high, according to a report by the Joint Center for Housing Studies of Harvard University. The slowing sales of homes, rising mortgage rates, calming home price growth are all likely to cool off the rise in home remodeling, the center said.

“While beginning to soften, growth in spending for home improvements and repairs is expected to remain well above the market’s historical average of 5%,” Abbe Will, associate project director of the Center’s Remodeling Futures Program, said in a statement. “In the first half of 2023, annual remodeling expenditures are still set to expand to nearly $450 billion.”

Here are the average HELOC and home equity rates as of July 21, 2022: 

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Loan Type This Week’s Rate Last Week’s Rate Difference
$30,000 HELOC 5.00% 4.99% 0.01
10-year, $30,000 home equity loan 6.91% 6.88% 0.03
15-year, $30,000 home equity loan 6.92% 6.90% 0.02

How These Rates Are Calculated

These rates come from a survey conducted by Bankrate, which like NextAdvisor is owned by Red Ventures. The averages are determined from a survey of the top 10 banks in the top 10 U.S. markets.

What’s the Difference Between Home Equity Loans and HELOCs?

The difference between what your house is worth and what you owe on mortgages and other home loans is called equity. When you get a home equity loan or HELOC, you use that equity as collateral to borrow money, typically to fund home improvement projects or other major expenses. 

Home equity loans and HELOCs work differently:

Home equity loans function similarly to a fixed-rate mortgage, in which you borrow a lump sum of cash up front and pay it back in installments over a set number of years at a set interest rate. They’re typically one of the cheaper forms of credit, and give you a large amount of cash with predictable payments.

HELOCs function a bit more like credit cards, in that the bank gives you a maximum amount you can borrow at once during a draw period and you can borrow some, pay it back, and borrow more until the draw period ends. You only pay interest on what you borrow. The rate is usually variable, meaning it will change over time with what the going rate is, generally based on a benchmark like the prime rate published by the Wall Street Journal.

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What’s Changing About Home Equity Loan and HELOC Rates?

Experts expect home equity loans and HELOCs to keep rising through the end of the year. A lot of HELOCs have variable rates based on the prime rate, which tracks changes the Federal Reserve makes to its short-term interest rate. The Fed is expected to keep raising its benchmark rate to combat high inflation, which was 9.1% year-over-year in June, according to the Consumer Price Index. Fed officials have signaled they will likely raise their benchmark rate by 75 basis points at the end of July. For home equity loans, rates are set based on the lender’s cost to borrow money, which is also affected by Fed changes, among other factors. 

Home equity products have gained popularity in part due to the recent dramatic increases in mortgage rates, which have made cash-out refinances less attractive. Cash-out refis were popular when mortgage rates were at record lows and home prices increased, but mortgage rates have risen more than two percentage points since the start of the year, making consumers far less likely to want to take on a significantly worse mortgage rate just to borrow some cash.

What Risks Come With Home Equity Loans and HELOCs?

Like a mortgage, home equity loans and HELOCs are secured against your home. That means if you don’t pay it back, the bank can take your house. “If it’s not a need and it’s just some sort of desire or want, you should really ask yourself: Is this something that is wise?” Linda Sherry, director of national priorities for Consumer Action, a national advocacy group, told us.

Home equity products cost less than most other loan products, but aren’t the best choice for everything. HELOCs, for example, are particularly good for home renovation projects, but you likely don’t want to take on the risk involved to get cash for a vacation or to invest in the stock market. 

Pro Tip

Home equity loans and HELOCs aren’t the best choice for every use. They may be good for home improvements, but you may want to avoid taking one out just to go on vacation, experts say.

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What Does the State of the Housing Market Mean for Home Equity?

Homeowners who have lived in their homes for more than a year or so likely have a lot more equity now because of the big run-up in housing prices in the past two years. The median home listing price was $450,000 in June, up 38.5% compared to June 2019, according to Realtor.com. 

Higher mortgage rates have slowed down the pace of home sales, but experts tell us prices are unlikely to come down significantly nationwide because of a mismatch between the supply of available homes and demand for them. 

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What Is The Average Mutual Fund Return On Investment?

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What Is The Average Mutual Fund Return On Investment?

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We want to help you make more informed decisions. Some links on this page — clearly marked — may take you to a partner website and may result in us earning a referral commission. For more information, see How We Make Money.

Mutual funds are one of the most popular investment vehicles on the market thanks to their diversification, which means your money is spread out among hundreds or thousands of companies. This protects your investments from any downturns in the market, which helps you build wealth. Instead of investing in individual stocks, mutual funds allow you to easily invest in the entire stock market — or just one sector — by investing in just one mutual fund. And with only a few mutual funds, you could build a well-diversified portfolio with multiple asset classes and a broad market exposure.

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But you might be wondering, as you would for any other investment, what kind of return you can expect with mutual fund investing. Experts agree that investing is the key to building wealth, but just like any investment, there are risks. Mutual funds tend to outweigh most of the risks because of their diversification. We spoke with a couple of finance industry experts to learn what the average return is for mutual funds, as well as how those returns compare to other types of investments.

Average Returns for Mutual Funds

There are more than 7,500 mutual funds that span different sizes, investment styles, sectors, and more. As a result, it would be impossible to pin down a so-called “normal” or average return that would apply to every mutual fund. Instead, the return you can expect depends on the type of mutual fund you’re investing in.

“When people talk about ‘average returns’ they are normally referring to a certain benchmark like the S&P 500 Index,” said Ryan Ortega, a financial advisor and the founder of Third Line Financial Planning in Los Angeles.

According to the U.S. Securities and Exchange Commission, the stock market has an average historical return of about 10% per year. However, that only tells what type of return you might expect if you invested in a total market mutual fund. 

When you add other types of mutual funds into the mix, the average return may look very different. After all, some mutual funds are made up of fixed-income assets with historically lower returns than the stock market. On the other hand, you might also have a mutual fund filled with small-cap stocks, which are known for greater volatility but higher growth potential.

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Average returns also differ from active to passive funds. A passive fund — also known as an index fund — is one that tracks the performance of a particular index. An active fund, on the other hand, has a fund manager that actively manages it and chooses the investments. Historically, passive funds tend to outperform active ones consistently, especially over longer time horizons.

Ultimately, there’s no one average return we can apply to all mutual funds. Instead, it’s important to consider your required return — meaning the return you would need to achieve your financial goals — and the type of funds you’re invested in.

“One issue that we run into is we’ll read different articles and see different number quotes,” Ortega said. “We might see that the stock market has returned 8% over the years.”

But according to Ortega, it isn’t enough to simply compare that benchmark number to your portfolio and if your portfolio falls short, assume you’ve done something wrong.

“First, we have to understand the timeframe where that number is coming from. What start date are they using? Understand if that number is looking at stocks and bonds or only bonds. Then when you compare it to your portfolio, you can look at what assets your portfolio is holding compared to that benchmark.”

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Average Returns by Sector 

As we mentioned, one of the factors that influence mutual fund returns is the sector they’re invested in. Some mutual funds incorporate all 11 stock market sectors, while others may focus on just one.

Over any given timeframe, the returns of one sector can differ significantly from the returns of another. For example, according to data from the S&P Dow Jones Indices, in the 12 months preceding February 2022, the energy sector had the highest returns, with an annual average of 53.67%. On the other hand, the communications services sector had an average annual return of negative 3.64%. 

Had you only invested in one of these sectors, your portfolio would have either performed really well or really poorly. However, we can never know ahead of time which sectors will perform well. As a result, financial experts generally recommend a diversified portfolio that includes exposure to all sectors so you can take advantage of large gains while somewhat insulating yourself from the effects of large losses.

Pro Tip

If you’re just getting started with investing, consider opting for a target-date mutual fund or one that tracks the total stock market. You’ll have broad market exposure and a portfolio that keeps pace with the market, which can help you build wealth.

Mutual Fund Returns vs. Individual Stocks

Many investors choose to invest in individual stocks instead of mutual funds, but many experts disagree with this financial move. When we look at individual stocks, it becomes even more difficult to identify an average return. Just like the different sectors we discussed, some stocks will outperform the market, while others will drastically underperform.

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One of the benefits of investing in mutual funds is you get many of the benefits of investing in individual stocks. But instead of buying just one or a few individual stocks, you’re buying hundreds or thousands. You get the benefit of those stocks that match or outperform the market. And at the same time, those stocks that underperform don’t make up enough of your portfolio to do any real damage. This is why diversification is so important.

It’s also important to note that mutual funds offer more exposure not only in the number of stocks in your portfolio but also in other assets. When you build your portfolio with individual stocks, you only have equity exposure, and as a result, are likely to see your portfolio take a major hit when the stock market is down.

But a more diversified mutual fund portfolio might also include bonds, commodities, and more. As a result, when the stock market is down, you might have investments that are performing better and can help to alleviate some of the volatility in your portfolio.

Mutual Fund Returns vs. ETFs 

Mutual funds and exchange-traded funds (ETFs) are similar in that they are both pooled investments that hold a large number of underlying assets. They can either track the performance of a particular index or be managed by a professional fund manager.

The key difference between mutual funds and ETFs is the way they trade. An ETF trades in a similar way as a stock, while trades on a mutual fund work a bit differently.

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“One significant difference between mutual funds and ETFs is that while mutual funds trade only once a day at the end of the day, ETFs trade throughout the day,” said Dann Ryan, a CFP and the founder of Sincerus Advisory. “So while this means you get one price a day on a mutual fund, you get many for an ETF.”

When you decide to invest in a particular index, you’ll often find both mutual funds and ETFs for that index. For example, there are S&P 500 mutual funds and ETFs, and they both hold the same underlying assets. 

The biggest difference in your returns when you have a similar mutual fund and ETF is likely to come down to the fees. For example, Vanguard’s S&P 500 mutual fund has an expense ratio of 0.04%, while it’s S&P 500 ETF has an expense ratio of 0.03%. The difference between the two is so minimal you’ll barely notice it in your returns. But if you had expense ratios that were significantly further apart, the difference between your returns would also be larger.

Additionally, as we mentioned, both mutual funds and ETFs can be either active or passive, and each fund has its own strategy and prospectus. If you’re going to compare the returns of a mutual fund to those of an ETF, be sure you’re comparing funds with a similar asset allocation.

Mutual Fund Returns vs. Hedge Funds

A hedge fund is an investment vehicle used by wealthy individuals where they pool their money together to invest in higher-risk opportunities.

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While the goal of a mutual fund is often to match the returns of the stock market, the goal of hedge funds is to beat it. However, in exchange for those higher potential rewards, investors must also accept above-average risk. As a result, hedge fund investments are generally only available to accredited investors, meaning those with high incomes or high net worths.

Just like individual stocks and sectors, investing in hedge funds offers little predictability. In any given year, you’ll likely have some hedge funds that drastically outperform the market and others that drastically underperform. And at the start of the year, you won’t know which is which.

When considering adding mutual funds or hedge funds to your portfolio, it’s likely not an either-or decision. Instead, experts generally recommend allocating the majority of your portfolio to diversified investments like mutual funds, while leaving just a small portion for speculative investments, which could include hedge funds or other types of investments like cryptocurrency.

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