Expect home equity loan rates to rise after Fed rate hike


Home equity loan rates are expected to rise in line with the increase in the Federal Reserve’s federal funds rate announced today.

Key points to remember

  • The Federal Reserve raised its key rate by 0.75% to a target range of 3.75% to 4% at its November 2 meeting.
  • Today’s rate hike is the sixth in 2022 in an effort to reduce consumer demand, consumer prices and inflation.
  • Interest rates for all types of loans, including home equity and home equity lines of credit, are expected to increase in line with the latest rate increase.

The Fed raised its key rate by 0.75% to reach a target range of 3.75% to 4% at its November 2 meeting. like in september. It is the sixth rate hike this year to combat high inflation in the United States, which was 8.2% year-on-year in September. The Fed’s inflation target is 2%.

Interest rates on many home equity products such as home equity loans and home equity lines of credit (HELOCs) generally change in sync with changes in the Fed’s target interest rate. So, as the Fed raises its rate again, expect to pay more to access the equity in your home.

Home equity product rates are generally higher than traditional 30-year mortgage rates. They vary based on factors such as the type and terms of the product and the qualifications of the borrower, including their credit rating and amount of home equity. As of October 26, 2022, the average rate was 7.29% for a home equity loan and 7.30% for a HELOC, according to Bankrate statistics.

What are home equity products?

Home equity products allow you to tap into the equity in your home and use the money for other purposes, such as home improvement, debt consolidation, or tuition.

For example, a home equity loan provides a lump sum payment that typically has fixed payments over a set period of time. A HELOCinstead, provides a revolving line of credit that homeowners can use as needed, much like using a credit card.

Home prices have risen significantly since the second quarter of 2020 (although some analysts expect prices to fall in 2023). The result is that homeowners have a lot more equity. In fact, home equity hit an all-time high in the second quarter of 2022 in the United States, according to Black Knight, a mortgage data company. home equity levels soared to $11.5 trillion, up 25% from a year earlier.

If home values ​​begin to decline and erode equity, as Fannie Mae economists expect next year, borrowers holding HELOCs could see their lines of credit frozen. Or, if the value of their home drops, lenders could limit their HELOC line of credit. This is because a HELOC credit limit is tied to the value of the home. A Personal loan can be an unsecured option that is not tied to home equity and can be used for any purpose, including home improvement.

In addition to facing higher home equity lending rates in the coming months, you can expect a higher Fed rate to likely increase the cost of other financing, such as traditional mortgages. , car loans and credit card debt.

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