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.
“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
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.”
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.
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 no
t 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.”
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.
“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.
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.