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Home Equity And HELOC Rates Keep Rising. How Homeowners Can Prepare For More Increases Ahead

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Home Equity And HELOC Rates Keep Rising. How Homeowners Can Prepare For More Increases Ahead

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Home equity loan and line of credit (HELOC) rates are up for the second consecutive week. The increases came after the Federal Reserve last week hiked its benchmark short-term interest rate by 75 basis points in an effort to combat persistently high inflation.

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The Fed’s move is expected to increase borrowing costs for banks and other lenders — higher costs that are passed along to consumers in the form of higher interest rates. For HELOCs, which have a variable rate component based on an index that tracks with the Fed’s changes, the move translates more directly into higher rates. Those variable rates should move up 75 points in step with the Fed’s news, although that often happens starting with the month following the central bank’s announcement, so consumers should see those increases in July, according to Vikram Gupta, head of home equity for PNC Bank.

More Fed increases are expected through the end of the year, although “the pace of those changes will continue to depend on the incoming data and the evolving outlook for the economy,” Federal Reserve Chairman Jerome Powell told a U.S. Senate committee this week

Here are the average rates as of June 23, 2022: 

Loan Type This Week’s Rate Last Week’s Rate Difference
$30,000 HELOC 4.70% 4.49% 0.21%
10-year, $30,000 home equity loan 6.83% 6.76% 0.07%
15-year, $30,000 home equity loan 6.83% 6.71% 0.12%

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 a Home Equity Loan and a HELOC?

The difference between what your home is worth and what you owe on mortgages and other home loans is called equity. With a home equity loan or HELOC, both considered types of second mortgages, you use that equity as collateral to get a loan, often to fund home improvement projects or other major expenses. 

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Home equity loans and HELOCs look different:

Home equity loans are similar to a fixed-rate mortgage, in which you borrow a certain amount of cash and pay it back over a set number of years at a certain interest rate. 

HELOCs are more akin to credit cards, in that the bank gives you a maximum amount you can borrow at any one time during a draw period and you can take out some, pay it back, and borrow more until the draw period ends. You only have to pay interest on what you borrow. The interest rate tends to be variable, meaning it will change over time with an index like the prime rate.

What Factors Affect Home Equity Loan and HELOC Rates?

Experts anticipate home equity interest rates will continue to climb throughout 2022. Lenders often base the variable rates of HELOCs on the prime rate published by the Wall Street Journal, which generally tracks changes to short-term interest rates by the Federal Reserve. The Fed has already raised those rates three times this year, the latest by 75 basis points last week. That was the Fed’s largest single increase since 1994.

“We’re in a rising rate environment,” Gupta told us. “It’s tied to an index that is going up, ergo the rate will go up.”

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Home equity loan rates are set more like mortgage rates. Experts also expect them to keep climbing. 

Consumers are turning more and more to home equity products in part because of the significant increase in mortgage rates, which has made cash-out refinances less appealing. Cash-out refis were popular when mortgage rates were at record lows and home prices were increasing, but mortgage rates are up 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 get some cash.

There Are Risks to 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. Be careful when you borrow. “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.

Pro Tip

Be careful not to spend too freely with a HELOC. It functions a bit like a credit card, and while the interest rate is much lower, you will still have to pay the money back eventually.

Be wary not to overdo it. HELOCs, especially, can be tempting for some borrowers, leading to taking out more debt than you need, experts say. “Debt can be a powerful tool, but it can also be abused,” warns Devin Pope, partner and senior wealth advisor at Albion Financial Group.

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If you understand the risks and know you can pay the money back, home equity loans and HELOCs can provide lower interest rates than other types of borrowing. Experts say it’s wise to be careful with any kind of borrowing, and do it only in situations where you’re confident you’ll have the cash in the future to repay.

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Home Equity Can Boost Your Net Worth, Help You Borrow Cash, And More. But What Is It, Exactly?

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Home Equity Can Boost Your Net Worth, Help You Borrow Cash, And More. But What Is It, Exactly?

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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.

There are many perks to homeownership. You can paint your walls whatever color you want. You can have a cat (or three). And you can also establish equity — that is, gain full ownership of your home bit by bit as you pay down your mortgage. Over time, that equity can improve your net worth, and you can even borrow against it when you need cash to fund home improvements or consolidate debt. 

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U.S. home prices are up 42% since the beginning of the pandemic, according to a report from data analytics company Black Knight. That means millions of homeowners now have thousands more in equity than they did just a few years ago. If you’re one of them, you may have the opportunity to tap into your home equity to help accomplish your personal or financial goals. But before you can do that, you first need to understand what home equity is, how it works, and how you can use it to your advantage. Here’s what you need to know.

Home Equity Defined

Home equity is the current value of your home minus what you owe on your existing mortgage loan. For example, if your home is worth $300,000 and you owe $150,000 on your mortgage, you have $150,000 in equity. 

How Does Home Equity Work?

How much equity you have in your home is calculated as the difference between your home’s current market value and your mortgage balance. Over time, your equity amount can fluctuate for the following reasons:

Home Values Change

As homeowners across the country have experienced, home values can increase — sometimes dramatically. If your house’s market value goes up, you can gain a significant amount of equity even though your mortgage balance hasn’t changed. 

For example, let’s say your home was worth $300,000, and you owed $150,000 on the home loan, giving you $150,000 in equity. Thanks to skyrocketing house prices, your home is now worth $350,000. Even if you made no progress against the mortgage balance, your equity would increase to $200,000. 

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However, you should know that home equity can also decline if your home’s value drops at a faster rate than you pay down your mortgage. If you owe more on your mortgage than what your home is worth, you have negative equity, also known as being underwater on your loan.

Decreased Mortgage Balance

Your equity will increase naturally as you pay down your mortgage balance with each monthly payment. But some people are laser-focused on paying off their mortgages early. If you make extra payments, increase your monthly payments to more than the minimum, or use windfalls to make lump sum payments against the principal, you can decrease the balance and increase your equity. 

For example, let’s say you own a $300,000 home and currently owe $150,000. You received an unexpected windfall of $5,000. By applying that full amount to your mortgage, you reduce the balance by $5,000, and you now owe just $145,000. As a result of the lower balance, your equity increases to $155,000. 

Increasing your home equity by paying down your loan balance has another perk: once you hit 20% equity, you can request the cancellation of private mortgage insurance (PMI), an added monthly cost your lender charges on conventional loans when you put less than 20% down. 

How Can You Use Your Home’s Equity?

You can borrow against your home if you’ve built enough equity, says Madison Block, senior marketing communications associate with the non-profit credit counseling agency American Consumer Credit Counseling

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“Home equity can be used as collateral to turn into cash through a home equity loan or home equity line of credit (HELOC),” Block says. “They’re often used for home improvements, major purchases or expenses, and debt consolidation.”

When determining how to use your home’s equity, consider your loan-to-value ratio (LTV). Your LTV is a measure lenders use to compare the amount of mortgage debt you have with the appraised value of your property. 

To calculate your LTV, divide your loan balance by the home’s value. For example, if you owe $150,000 on a $300,000 home, divide $150,000 by $300,000. The result — 0.50 or 50% — is your LTV. 

In general, most lenders allow you to borrow around 80% to 85% of the equity in your home. To figure out how much you can borrow, multiply the lender’s maximum loan-to-value ratio by the value of your home, then subtract the balance on your mortgage. For example, if you have a $300,000 home and owe $150,000 on your mortgage, here’s how you would calculate your maximum loan amount when borrowing against your home equity: 

  • $300,000 (current value of home)  x 0.80 (lender LTV limit) = $240,000 (maximum equity available to borrow, not including your primary mortgage)
  • $240,000 (maximum equity available) – $150,000 (current mortgage balance)= $90,000 (the maximum you can borrow)

Best Options to Borrow Against Your Home’s Equity

If you have a major expense coming up, you can tap into your home’s equity to cover the cost. There are three main ways to borrow against your home equity: 

Home Equity Line of Credit (HELOC)

A HELOC is a revolving line of credit, meaning you can use it again and again during the HELOC’s draw period. A bank or credit union will approve you for a certain credit limit based on your available equity, and you can use up to that amount. HELOCs usually have variable interest rates, but you pay interest on only the amount you use, not the entire credit line. 

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Home Equity Loan

A home equity loan is an installment loan that gives you one lump sum of cash upfront. Like a HELOC, a home equity loan is secured by your home. Unlike a HELOC, a home equity loan has a fixed interest rate and fixed monthly payments. Because they are collateralized, home equity loans tend to have lower interest rates than other forms of credit, such as personal loans or credit cards

Home equity loans and HELOCs are second mortgages, meaning they’re separate from your primary mortgage. Taking out a home equity loan doesn’t affect your current mortgage’s rate or repayment period. 

Cash-out refinance

Unlike home equity loans and HELOCs, cash-out refinancing is a way to replace your existing mortgage with an entirely new loan. 

With a cash-out refinance, you take out a new mortgage for more than you owe on the current one. After paying off the existing mortgage, you receive the difference as a lump sum of cash. 

The new loan will have different terms than your old one, so you’ll have a new repayment period and interest rate. 

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If you currently have a low mortgage rate, keep in mind that a cash-out refinance loan will likely have a significantly higher rate. For example, in January 2021, rates were as low as 2.93% for a 30-year, fixed-rate mortgage. As of June 2022, the average rate is 5.78%. If you bought your home or refinanced when rates were low, it might not be worth it to get a cash-out refinance at a higher rate now. 

Cash-out refinancing also typically comes with upfront closing costs. Home equity loans and HELOCs sometimes also have closing costs, but they’re typically lower and are more likely to be waived by lenders.

How to Build More Equity in Your Home

To build more equity in your home, use these tips: 

Put Down a Larger Down Payment 

A large down payment allows you to establish equity sooner, according to Todd Christensen, education manager with Debt Reduction Services, a non-profit credit counseling agency.

“The larger your down payment, the greater your home equity from the moment you take ownership of your home,” says Christensen. 

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Plus, you can avoid private mortgage insurance (PMI) if you put down at least 20%, saving you some extra money.  

Make Extra Mortgage Payments

Paying more than the minimum required allows you to chip away at the mortgage principal faster. Over time, extra payments — even as little as $50 to $100 per month — can help you establish more equity. 

“Every payment you make toward your home’s principal balance generally increases your home equity,” says Christensen. “Making extra principal payments lowers your mortgage balance and therefore increases your equity.”

Pro Tip

An easy way to build equity is to switch to a biweekly payment schedule. You’ll end up making an extra mortgage payment every year, increasing your equity and reducing interest charges.

You can make regular extra payments every month, or use sudden windfalls to make lump-sum payments to reduce the mortgage principal and boost your equity. If you currently pay PMI but qualify for removing it — which requires building up 20% equity in your home — you can also put the monthly savings from getting rid of PMI toward adding a little extra to your monthly mortgage payment.

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Complete Remodeling Projects

There are some home improvements that can increase your home’s value, giving you more equity. 

For example:

  • Refinishing floors: Refinishing hardwood floors costs $3,400, on average. But in the National Association of Realtors’ 2022 Remodeling Impact Report, realtors estimated that sellers would recoup $5,000 — an 147% increase. 
  • Adding a bathroom or bedroom: The National Association of Home Builders reported that 78% of homebuyers wanted at least three bedrooms in a new house, and 84% wanted two or more bathrooms. If your home doesn’t meet those criteria, adding a bedroom or converting a half-bath into a full bath can increase the home’s value. 
  • Adding an accessory dwelling unit: Homes with an accessory dwelling unit, also known as an in-law suite, are priced approximately 35% higher than homes without one, according to Porch, a site that connects homeowners with home improvement professionals. 

As an added bonus, home equity loans or HELOCs used for home improvements can have tax benefits. “The interest paid is usually tax-deductible,” says Block. You just need to make sure you meet certain other requirements.

Wait for Property Values to Rise

When your home’s market value increases due to market conditions, you gain home equity without having to do anything. However, this can take time. While there have been massive spikes in home values over the past two years — average home prices are up 42% since the beginning of the pandemic — home values usually appreciate at a more modest rate. The average yearly increase in home values from 1999 to 2019 was 3.9%, according to data from Black Knight’s home price index provided by a Black Knight representative. 

Keep in mind that as property values rise, your property taxes may also increase, which could increase the cost of homeownership.

Is It Safe to Borrow Against the Equity of Your Home?

While borrowing against your home equity can be tempting, there are some risks: 

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  • You risk foreclosure: “A major risk of borrowing against equity, such as with a HELOC, is that you could lose your home if you default on the loan because your home is the collateral,” cautions Block. If you don’t make your payments, the lender can begin foreclosure proceedings against your home. 
  • You increase mortgage debt: When you borrow against your home equity, you’re adding to your overall mortgage debt. It can take more time to pay off your mortgage, and that problem can make it difficult to retire or save for other financial goals. 
  • You could be tempted to overspend: Having access to a large sum of cash or a line of credit can tempt you into overspending on non-essentials and cause you to rack up unnecessary debt. “I highly discourage the use of home equity for anything that does not either increase your net worth or increase your earnings,” says Christensen. “Borrowing against your home equity is still debt, and debt will always involve risk and almost always involve interest.”

To minimize those risks, only borrow what you need, and be sure to have a strategy in place for repaying the borrowed funds. For non-necessary expenses, such as a vacation or wedding, consider budgeting and setting aside money each month in a savings account rather than borrowing money.

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Home Equity Rates Rose This Week, With More Increases On The Way As Fed Continues To Fight Inflation

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Home Equity Rates Rose This Week, With More Increases On The Way As Fed Continues To Fight Inflation

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Customers shop at a Home Depot store in Chicago.

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.

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Home equity loan and line of credit (HELOC) rates rose slightly this week.

The Federal Reserve’s decision this week to raise its benchmark short-term interest rate by 75 basis points will likely translate into higher rates for HELOCs in the near future, which often have a variable rate that tracks an index affected by the Fed’s changes.

Here are the average rates as of June 15, 2022: 

Loan Type This Week’s Rate Last Week’s Rate Difference
$30,000 HELOC 4.49% 4.45% +0.04%
10-year, $30,000 home equity loan 6.76% 6.71% +0.05%
15-year, $30,000 home equity loan 6.71% 6.68% +0.03%

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 Going On With Home Equity Loans and HELOC Rates?

Interest rates for home equity loans and HELOCs are expected to climb through the end of 2022. Many HELOCs base their variable rate on the prime rate, which tends to track increases in short-term interest rates by the Federal Reserve. The Fed is expected to keep raising its benchmark rate to combat high inflation. This week, the Fed raised that rate by 75 basis points – the largest single increase since 1994 – which will likely correlate to HELOC rates rising by a similar amount. 

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“We’re in a rising rate environment,” Vikram Gupta, head of home equity for PNC Bank, told us. “It’s tied to an index that is going up, ergo the rate will go up.”

For home equity loans, rates are set more like mortgage rates, and are also likely to keep climbing as banks’ borrowing costs increase. One thing could affect that – a recession could change trends in interest rates, Rob Cook, vice president of marketing, digital and analytics for Discover Home Loans, told us. “My outlook is it will either be flat or an upward trend for rates in the course of this year.”

Consumers are increasingly turning to home equity products due in part to the recent dramatic increases in mortgage rates, which have made cash-out refinances less attractive. Cash-out refis were popular in recent years as 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 get some cash.

Pro Tip

Know how your home equity loan works and how the interest rate is set. HELOCs often have variable rates that change when the Federal Reserve raises interest rates, as is happening now.

How Do Home Equity Loans and HELOCs Work?

When your home’s value is more than what you owe on mortgages and other home loans, that difference is called equity. With a home equity loan or HELOC, you use the equity as collateral to borrow money, often to fund home improvement projects or other major expenses. 

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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. 

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

What Borrowers Should Know About 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. Be careful when you borrow. “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.

It’s also important to understand that just because the value of your house has increased doesn’t mean it will stay there forever. Real estate values can drop. Your market might also see prices fall while national trends are upward. “I think you have to look at it as if the amount you could sell your house for might go down in the future and you don’t want to borrow too much against it because at closing you’d have to pay back an unusually large sum,” Sherry says. “You might end up underwater in a really bad scenario, where you would owe back more at closing than you actually were able to sell the house for.”

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If you understand the risks and know you can pay the money back, home equity loans and HELOCs can provide lower interest rates than other types of borrowing. Experts say it’s wise to be careful with any kind of borrowing, and do it only in situations where you’re confident you’ll have the cash in the future to repay.

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Home Equity Loans Are Making A Comeback. 4 Experts Predict The Rates You Can Get This Year

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Home Equity Loans Are Making A Comeback. 4 Experts Predict The Rates You Can Get This Year

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A shopper at a home improvement store in Bethesda, Maryland, on February 17, 2022. As home values and mortgage rates rise, tapping existing home equity for home improvements is becoming more appealing than moving or refinancing.

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.

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Home equity loans and lines of credit (HELOCs) are back.

When mortgage rates were below 4% 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 rate on a 30-year fixed mortgage is above 5%, and experts say it no longer makes sense to ruin the good rate you might have on your main home loan to do a cash-out refinance. “Why would you want to disrupt that? You wouldn’t,” says Jim Albertelli, CEO of Voxtur Analytics, a real estate technology company.

Instead, there are other ways to get at the equity built up in the home. “What you’d 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 tap into that for home improvement or whatnot,” says Albertelli.

Home equity loans and lines of credit (HELOCs) are often called second mortgages because you’re borrowing against the value in your home not covered by your first mortgage. They haven’t been popular for years, in part due to low mortgage rates and in part due to the loose lending practices involving them that helped precipitate the foreclosure crisis 15 years ago. But mortgage rates aren’t that low anymore and home equity lending is far more tightly regulated now, leading to a resurgence, experts say. Rob Cook, vice president of marketing, digital and analytics for Discover Home Loans, says the market is up about 50% year-over-year.

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“This product has been unloved for 15 years,” says Vikram Gupta, head of home equity at PNC Bank. “Is it now the return of home equity?”

Make sure you get a good rate on these products if you want to take advantage of them. Here’s what four experts predict about home equity and HELOCs for 2022.

Experts Predict Home Equity Loan and HELOC Rates Through 2022

Vikram Gupta, head of home equity at PNC Bank

For HELOCs, the variable rate usually tracks the prime rate, which follows changes to short-term rates by the Federal Reserve, Gupta says. “That piece of the equation, rates will go up. It’s a variable rate. We’re in a rising rate environment. It’s tied to an index that is going up, ergo the rate will go up.”

Jim Albertelli, CEO of Voxtur Analytics, a real estate technology company

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Expect home equity rates to end up a bit higher than the 30-year fixed mortgage rate, Albertelli says. “You can expect your home equity line of credit or [home equity loan] to be somewhere in the 6.5 to 8% range as we go into the end of this year and into next year.”

Rob Cook, vice president of marketing, digital and analytics for Discover Home Loans

Home equity rates might mirror the upward trend of mortgage rates, but fears of a recession could dampen those increases, Cook says. “My outlook is it will either be flat or an upward trend for rates in the course of this year.”

Mark Hinshaw, co-founder and president of Candor Technology, a mortgage technology firm

Home equity rates could rise by 50 to 100 basis points this year, Hinshaw says. “The prime [rate] will track with those rate increases that the Fed issues.”

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Home Equity Loan vs. HELOC

Home equity lending is typically broken down into two products that function differently. First is a traditional home equity loan – you borrow a certain amount of cash in one lump sum and then pay it back with monthly payments, similar to a fixed-rate mortgage. The second is a home equity line of credit or HELOC, in which the lender approves you for a certain amount of credit and you can borrow up to that limit at a time when you need it, only paying interest on the money you’ve taken out. Like a credit card secured by your house.

Pro Tip

When choosing between a home equity loan and a HELOC, consider how soon you’ll need the money and whether you need it all at once. If you don’t need it all at once, a HELOC might be a better deal.

So how do you decide? That has to do with your personal financial situation and what you plan to use the money for, says Mark Hinshaw, co-founder and president of Candor Technology, a mortgage technology firm.

A HELOC makes more sense if you’re not sure yet exactly what you’ll spend the money on or if you don’t plan to spend it immediately, Hinshaw says. If you went for a home equity loan instead of a HELOC in that situation, you’d have the money sitting by and be paying interest on cash that isn’t being used yet.

A home equity loan makes more sense if the need is immediate and you know exactly what you’ll have to pay, he says. “​​Let’s say you’re going for a home improvement, there’s a particular amount they want to spend, you’re not interested in spending money on other things, and you’re more conservative and risk-averse when it comes to interest rates, then I would say the loan would be the better route for you to go.”

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How Are Home Equity and HELOC Rates Set?

HELOC rates are fairly simple in that they typically have two components: a variable piece that moves with an index, usually the prime rate published by the Wall Street Journal, and a margin added (or subtracted) by the lender, which doesn’t change. It could be the prime rate plus 75 basis points, or two percentage points, for example, Gupta says. With the prime rate at 4% at the start of June, that would mean a HELOC rate of 4.75% with a 75-point margin for the bank. 

For example, the average rate for a $30,000 HELOC on June 1, 2022, was 4.35%, according to a survey by Bankrate, which like NextAdvisor is owned by Red Ventures. 

Interest rates for home equity loans, as a fixed-rate product, are set more like mortgage rates, with a variety of factors going into them. Those include the cost for the bank to get the money, the lender’s operating expenses, their profits, and a margin to cover the risk that you, the borrower, won’t pay it back, Hinshaw says. Compared to a variable-rate HELOC, a fixed-rate loan is “going to end up being a little bit more expensive because they’re taking an interest rate risk,” he says.

The average rate for a 10-year, $30,000 home equity loan was 6.73% on June 1, 2022, per Bankrate.

Why Consider a Home Equity Loan or HELOC?

Homeowners who have a lot of equity built up and who have a need for cash can take advantage of these tools to borrow at a rate that’s usually significantly lower than unsecured debt such as personal loans and credit cards.

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“It allows people to maintain the low rate they have on their primary mortgage,” Cook says. “It’s a good financial vehicle from that perspective.”

Such borrowing can help consumers get the house they want in a market that isn’t conducive to moving. Buying a new home can be a hassle at the moment, with prices sky-high and homes sitting on the market for just days in many parts of the country. “For a lot of consumers it makes sense to stay where you are in your current home and look to improve it,” Albertelli says.

Risks of Borrowing Against Your Home

Like a mortgage and unlike credit cards or personal loans, there’s one big risk with home equity loans and HELOCs: You could lose your home. “Any time you’re using your home as collateral, if you ultimately do not pay, there’s risk of foreclosure,” Cook says.

That risk is the reason interest rates on debt secured by your home are lower than those for unsecured debt, Gupta says. Lenders have the ability to recoup their losses by taking and selling your house if you don’t pay. “That risk always remains where you’re using your house, but if used wisely and sensibly it’s a more cost-effective way versus borrowing unsecured,” he says.

Knowing that risk, be prudent about what you do with home equity loans and lines of credit. Experts advise that it’s usually best to borrow for necessities and things like major home improvement products that will boost the value of your house. 

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As for the risk that you’ll borrow too much and be unable to repay, experts say you should maintain a cushion of equity that isn’t tied up in debt and work with lenders who are doing their due diligence with your loan. Home equity loans caused trouble 15 years ago, but regulations have increased and banks shouldn’t be giving out loans willy-nilly anymore. “Even if the borrower wanted more, the lenders will have strict limitations,” Gupta says.

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