Interest rates for home equity loans have risen sharply since the beginning of the year, but in many cases they’re still cheaper than other types of financing, such as personal loans and credit cards.
It’s likely the Federal Reserve will raise its benchmark interest rate again at its upcoming meeting next week -- although less aggressively than at previous meetings this year -- which means that home equity loan rates will also increase before the end of this year. For now, it can still help to tap your home equity at a lower interest rate than to take out a personal loan or apply for a credit card, because it can save you tens of thousands of dollars over the lifetime of your loan.
What are today’s home equity interest rates?
On average, home equity loan rates are hovering just under 8% but have been climbing steadily in reaction to the Fed raising interest rates six times so far this year.
“The cost of borrowing from home equity has gone up dramatically this year,” says Greg McBride, chief financial analyst for CNET’s sister site, Bankrate. “Whether you’re borrowing through a home equity line of credit, a fixed-rate home equity loan or a cash-out refinance, rates are rising at a very fast pace.”
Your interest rate will depend, in part, on the type of home equity loan you use. Home equity lines of credit, or HELOCs, also averaging just under 8%, have variable interest rates that fluctuate depending on market trends and economic conditions such as inflation. So, even if you start with a certain rate, it’ll change over time. (The average rate range on a HELOC is between 6.76% and 10.64%, according to Bankrate.) In comparison, home equity loans are fixed-rate loans, so the interest rate will stay steady when the Fed raises or lowers interest rates.
Regardless of the type of loan you use, rates are still elevated across the board and will remain high into 2023. “We’ve seen drastic increases in the rates for all of those avenues for borrowing,” says McBride.
| Loan type | Average rate |
|---|---|
| Home equity loan | 7.80% |
| 10-year fixed home equity loan | 7.96% |
| 15-year fixed home equity loan | 7.91% |
| HELOC | 7.93% |
Rates are as of Dec. 6, 2022. Source: Bankrate
What to make of current home equity interest rates?
Homeowners can expect home equity loan rates to increase slightly before the end of the year as the Fed is expected to raise interest rates again, but this time by only 50 basis points, or half a percentage point, a smaller increase than its most recent hike of 75 basis points. The Fed’s upcoming December meeting will also signal what’s likely to happen in 2023. Interest rate futures already suggest that rates will settle between 4% and 5%.
But if the Fed wants to hit its target inflation rate of 2%, it’ll have to keep raising rates next year. Federal Reserve Chairman Jerome Powell indicated recently that the Fed will be less aggressive about raising rates once it sees compelling evidence that inflation is actually abating. That means home equity loan rates probably won’t drop much lower anytime soon, as they typically follow interest rate trends.
Average home equity loan rates in major markets
The following table lists average home equity loan rates in five of the largest US metropolitan cities.
| Market | Average rate |
|---|---|
| New York | 7.99% |
| Boston | 6.93% |
| Chicago | 9.35% |
| Detroit | 9.37% |
| Philadelphia | 6.98% |
Rates are as of Dec. 6, 2022. Source: Bankrate
Average HELOC rates in major markets
The following table lists average HELOC rates in five of the largest US metropolitan cities.
| Market | Average rate |
|---|---|
| New York | 10.22% |
| Los Angeles | 10.64% |
| Chicago | 8.23% |
| Dallas | 9.08% |
| Washington, DC | 6.81% |
Rates are as of Dec. 6, 2022. Source: Bankrate
The bottom line
Although it’s likely interest rates will rise slightly by the end of the year, and continue rising in 2023, home equity loan rates available to you will depend not just on the macroeconomic environment, but your personal finances, too. Your credit score, income and debt-to-income ratio will all play a role in the rate a lender will offer you. It’s important to shop around to find the best rates and terms available, especially in this high interest rate economy. Even though the Fed is likely to increase rates again, now’s still a good time to consider taking out a home equity loan.
FAQs
Home equity is the difference between what you owe on your mortgage and the current appraised value of your home. You build home equity by making consistent monthly mortgage payments over the years. To determine how much equity you have in your home, simply subtract your outstanding mortgage balance from the current appraised value of your home. It typically takes a homeowner between five and 10 years to build up enough equity to borrow against their home.
Owning a home and building up its equity is important, because it’s a reliable way to build wealth over time. As you pay down the principal balance on your mortgage, you’re establishing equity in your property that you can borrow against at a later date, should you need it. The ability to borrow against your home’s equity can come in handy if you need immediate access to a large amount of cash, and to borrow it at a lower interest rate than those of a personal loan or new credit card, which average 11% and 18%, respectively.
The two most common types of home loans are a fixed-rate home equity loan and a HELOC. A fixed-rate home equity loan provides you with a lump sum of a cash at a fixed interest rate that won’t change over the lifetime of your loan, providing you with predictable monthly payments.
A HELOC allows you to tap into your home’s equity over an extended period of time. It functions as a revolving line of credit that you can continually access during its draw period, typically over 10 years. The interest rate on a HELOC, however, is variable and will rise and fall, depending on what’s happening with the economy and the benchmark interest rate. That means your monthly payments won’t always be consistent and you may need a more flexible budget if rates increase.
Generally speaking, for both home equity loans and HELOCs, any rate that’s lower than the national average of just below 8% is considered a good rate.
The best uses of tappable home equity are for expenses that will increase your property’s value, such as home renovations, or expenses that are investments in your future, like college tuition. It’s advisable not to use a home equity loan for nonessential purchases, such as a vacation, because your home serves as collateral to secure the loan. A vacation isn’t worth risking your home to foreclosure if you can’t pay back your home equity loan for any reason.
