Home Equity Rates Hold Steady: What Homeowners Need to Know
Homeowners sitting on a pile of equity might be feeling a bit stuck. While primary mortgage rates remain stubbornly high, rates for home equity lines of credit (HELOCs) and home equity loans are also holding firm, averaging around 7.25% and 7.56% respectively, according to recent data from Curinos. The expectation is that these rates won’t be dropping significantly anytime soon, even as the Federal Reserve contemplates potential rate cuts later this year.
Why Aren’t Home Equity Rates Budging?
Unlike traditional mortgages, second mortgage rates – encompassing both HELOCs and home equity loans – are typically tied to the prime rate. The prime rate, currently at 6.75%, forms the base upon which lenders add a margin. This means that even if the Fed lowers its benchmark rate, the impact on HELOC and home equity loan rates will be less direct. Lenders also factor in credit risk and the combined loan-to-value ratio (CLTV) when setting rates, meaning your personal financial profile plays a significant role.
For example, a homeowner with excellent credit (780+) and a CLTV under 70% might qualify for a competitive rate, but someone with a lower credit score or a higher CLTV will likely face a higher APR.
HELOC vs. Home Equity Loan: Which is Right for You?
Both HELOCs and home equity loans allow you to tap into your home’s equity, but they function differently. A HELOC is a revolving line of credit, similar to a credit card. You can borrow, repay, and borrow again during the draw period (typically 10 years). Interest rates are usually variable, meaning they can fluctuate with the prime rate.
A home equity loan, on the other hand, provides a lump sum of cash upfront with a fixed interest rate. This offers predictability, as your monthly payments won’t change over the loan term. However, you’ll start accruing interest on the entire loan amount immediately.
Pro Tip: If you anticipate needing funds for ongoing expenses or unpredictable costs, a HELOC might be a better fit. If you have a specific, one-time expense, a home equity loan could provide more certainty.
The $34 Trillion Equity Opportunity
The Federal Reserve estimates that U.S. homeowners collectively hold over $34 trillion in home equity. This represents a significant potential source of funds for renovations, debt consolidation, or other financial needs. However, many homeowners are hesitant to refinance their primary mortgage if they already secured a historically low rate.
“Many homeowners are sitting on incredibly low mortgage rates from the past few years,” explains Sarah Miller, a financial advisor at BrightPath Wealth Management. “They don’t want to lose that advantage, and a HELOC or home equity loan allows them to access equity without touching their primary mortgage.”
Shopping Around is Crucial
Lenders have considerable flexibility in pricing second mortgage products. Rates can vary widely, from just below 6% to as high as 18%, depending on your creditworthiness and the lender. Don’t settle for the first offer you receive.
Did you know? Introductory HELOC rates can be misleading. While they may offer a low initial APR, the rate will likely jump significantly after the introductory period ends.
Current Rate Landscape & Lender Options
As of late May 2024, LendingTree is advertising HELOC APRs as low as 6.13% for a $150,000 credit line. However, this rate is subject to credit approval and other factors.
Several lenders consistently rank highly for HELOCs and home equity loans, including:
- Bank of America: Offers competitive rates and a streamlined application process.
- Wells Fargo: Provides a range of loan amounts and repayment terms.
- U.S. Bank: Known for its customer service and flexible options.
- LightStream (a division of Truist): Often features low rates for borrowers with excellent credit.
Understanding the Long-Term Costs
A $50,000 HELOC with a 7.50% interest rate and a 10-year draw period could result in monthly payments of around $313. However, remember that HELOCs typically transition to a 20-year repayment period after the draw period ends, and the variable rate could increase, leading to higher payments. Carefully consider your ability to manage potential rate increases before taking out a HELOC.
Frequently Asked Questions (FAQ)
- Q: Will my home equity rate drop if the Federal Reserve cuts interest rates?
A: Not necessarily. Home equity rates are primarily tied to the prime rate, not the federal funds rate. - Q: What is a good CLTV ratio to aim for?
A: A CLTV of 80% or less is generally considered favorable, but lenders often prefer ratios below 70%. - Q: Can I use a HELOC for any purpose?
A: Yes, HELOCs offer flexibility in how you use the funds. - Q: What are the tax implications of a home equity loan or HELOC?
A: Consult with a tax advisor, as tax deductibility rules can vary.
Accessing your home equity can be a smart financial move, but it’s crucial to understand the terms, rates, and potential risks involved. By carefully comparing lenders and considering your individual financial situation, you can make an informed decision that aligns with your goals.
Ready to explore your options? Compare current HELOC and home equity loan rates on Bankrate.
