Home equity loans are making a comeback. 4 experts predict the rates you can get this year

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

When mortgage rates were below 4% for the past couple of years, it only made sense to refinance your mortgage and cash out that way if you wanted to transform some of the equity in your home. in cash.

Now the average rate on a 30-year fixed mortgage is over 5%, and experts say it no longer makes sense to ruin whatever good rate you might have on your primary home loan to refinance. cash. “Why would you want to disturb this? You wouldn’t,” says jim albertelliCEO of Voxtur Analytics, a real estate technology company.

Instead, there are other ways to access the accumulated equity in the home. “What you would want to do is take some of the equity in your home and do it through a [home equity loan] or a home equity line of credit and tap into it to improve your home or whatever,” says Albertelli.

Home Equity Loans and Lines of Credit (HELOC) are often called second mortgages because you are borrowing against the equity in your home that is not covered by your first mortgage. They weren’t popular for years, partly because of low mortgage rates and partly because of the lax lending practices involving them that helped precipitate the foreclosure crisis 15 years ago. But mortgage rates aren’t so low anymore and home loans are now much more tightly regulated, leading to a resurgence, experts say. Rob Cookvice 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 home equity now back?”

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

Experts predict home equity loan and HELOC rates through 2022

Vikram Gupta

Vikram GuptaHead of Home Equity at PNC Bank

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

jim albertelli

jim albertelliCEO 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 between 6.5 and 8% at the end of this year and next year.

Rob Cook

Rob CookVP of Marketing, Digital and Analytics for Discover Home Loans

Home equity rates could reflect the upward trend in mortgage rates, but fears of a recession could dampen those increases, Cook says. “My outlook is that rates will be either flat or rising over the course of this year.”

Marc Hinshaw

Marc Hinshawco-founder and president of Candor Technology, a mortgage technology company

Home equity rates could rise 50 to 100 basis points this year, Hinshaw says. “First [rate] will follow with these rate increases issued by the Fed.

Home Equity Loan vs. HELOC

Home equity loans are generally divided into two products that work differently. The first is a traditional home equity loan – you borrow a certain amount of money in a lump sum and then pay it back in monthly installments, like 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 when you need it, paying only interest on the loan. money you took out. Like a credit card secured by your house.

Pro tip

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

So how do you decide? It has to do with your personal financial situation and what you plan to use the money for, says Marc Hinshawco-founder and president of Candor Technology, a mortgage technology company.

A HELOC makes more sense if you don’t know exactly what you’re going to spend the money on yet, or if you don’t plan to spend it immediately, says Hinshaw. If you opted for a home equity loan instead of a HELOC in this situation, you would have the money waiting and you would pay interest on the money that is not yet used.

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 go for a home improvement, there’s a particular amount they want to spend, you’re not interested in spending the money on other things, and you’re more conservative and interest risk aversion. rate, then I would say the loan would be the best route for you.

How are home equity and HELOC rates set?

HELOC rates are quite simple in that they generally have two components: a variable part that moves with an index, usually the preferential rate published by the Wall Street Journal, and a margin added (or subtracted) by the lender, which does not change. That could be the prime rate plus 75 basis points, or two percentage points, for example, Gupta says. With a prime rate of 4% in early 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 as of June 1, 2022 was 4.35%, according to a survey by Bankrate, which, like NextAdvisor, is owned by Red Ventures.

Home equity loan interest rates, as a fixed rate product, are set more like mortgage rates, with a variety of factors that come into play. These include the cost to the bank of obtaining l money, the lender’s operating expenses, its profits, and a margin to cover the risk that you, the borrower, don’t repay, Hinshaw says. Compared to a variable-rate HELOC, a fixed-rate loan “is going to end up being a bit more expensive because they’re taking on interest rate risk,” he says.

The average rate for a $30,000 10-year home equity loan was 6.73% as of June 1, 2022, per Bank Rate.

Why consider a home equity loan or HELOC?

Homeowners who have accumulated a lot of equity and need cash can take advantage of these tools to borrow at a rate that is typically 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 said. “It’s a good financial vehicle from that point of view.”

Such loans can help consumers get the home they want in a market that is not conducive to moving. Buying a new home can be a hassle right now, with sky-high prices and homes sitting on the market for just a few days in many parts of the country. “For many consumers, it makes sense to stay where you are in your current home and look to improve it,” says Albertelli.

Risks of borrowing against your home

Like a mortgage and unlike credit cards or personal loans, there is a big risk with home equity loans and HELOCs: you could lose your home. “Any time you use your home as collateral, if you end up not paying, there’s a risk of foreclosure,” Cook says.

This risk is why interest rates on debt secured by your home are lower than on unsecured debt, says Gupta. Lenders have the option of recouping their losses by taking and selling your home if you don’t pay. “That risk still remains where you use your home, but if used wisely and wisely, it’s a more cost-effective way than borrowing without collateral,” he says.

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

When it comes to the risk of you borrowing too much and not being able to repay, experts say you should keep an equity cushion that isn’t tied to debt and work with lenders who demonstrate due diligence with your loan. Home equity loans caused problems 15 years ago, but regulations have increased and banks should no longer give loans willy-nilly. “Even if the borrower wanted more, lenders will have strict limits,” Gupta says.

Garland K. Long