Why the Federal Reserve’s Rate Hike Will Make HELOCs More Expensive

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Key Takeaways

  • Home equity loan and HELOC rates held fairly steady this week, rising only slightly.
  • The Federal Reserve hiked its key short-term interest rate by 75 basis points, which will drive up the cost of borrowing money.
  • Higher interest rates for home equity products will likely make it more difficult to qualify for them in coming months
  • Experts expected a slowdown in home improvement projects predicted as rates continue to increase.

Inflation hasn’t blinked and neither has the Federal Reserve. But homeowners looking to tap into their home equity just might. 

The Fed on Wednesday announced an increase of 75 basis points to its benchmark short-term interest rate, the federal funds rate. 

A higher federal funds rate will mean higher rates for consumer loans. As a result, borrowing with a home equity loan or line of credit (HELOC) is going to be more expensive. 

This isn’t just the case for borrowers looking to take out a home equity loan or HELOC. If you have an existing HELOC, you can expect your monthly payments to rise as a result of today’s rate hike. HELOCs often have variable interest rates, which leaves them susceptible to rate hikes from the Fed. 

Higher interest rates for home equity products will also make it more difficult to qualify for them. “The home equity product is still great to have. So, if you can qualify for one now, I recommend doing it because things are only going to get worse. You might not be able to qualify for it six months from now,” says Vikram Gupta, executive vice president and head of home equity at PNC Bank. “Lenders are going to get more conservative about who they lend to- only choosing borrowers with high credit scores and stable jobs.”

Strong consumer spending levels are fanning the flames of inflation, which was at 8.2% year-over-year in September. While homeowners are sitting on record amounts of home equity, the Fed doesn’t want them to tap into it. Aggressive rate hikes are the Fed’s way of dumping buckets of cold water on inflation. 

“They want people to sit tight, tighten their belts, and put these things off,” Karl Wagner, partner at Biondo Investment Advisors, previously told us.

The average rate for a $30,000 HELOC was essentially flat at 7.32%. Home equity loan rates ticked up a tad. 

Here are the average home equity loan and HELOC rates as of Nov 2, 2022: 

Loan Type This Week’s Rate Last Week’s Rate Difference
$30,000 HELOC 7.32% 7.30% + 0.02
10-year, $30,000 home equity loan 7.57% 7.51% + 0.06
15-year, $30,000 home equity loan 7.49% 7.41% + 0.08

How These Rates Are Calculated

These rates come from a survey conducted by Bankrate, which like NextAdvisor is owned by Red Ventures. The averages are determined from a survey of the top 10 banks in the top 10 U.S. markets.

What are Home Equity Loans and HELOCs? 

Home equity loans and HELOCs are secured loans, meaning you use the difference between what your home is worth and what you owe on your mortgage as collateral. If you default on your payments, you risk losing your home. However, because the loan is secured by your house, you’ll likely be able to get a lower rate than you would with a personal loan.  

They differ in how you borrow. 

Home equity loans provide you with a one-time lump sum of cash that you’ll pay back over a set period. Because home equity loans typically have a fixed interest rate, your monthly payments won’t be affected even if the Fed continues to hike rates aggressively. 

In contrast, HELOCs usually have variable interest rates. While you’ll only pay interest on what you’ve borrowed, that payment will generally move in tandem with the federal funds rate – which is on the rise after today’s meeting. When borrowing with a HELOC, you have access to a revolving line of credit. It’s up to you when you want to tap it, but there are limits to how much you can take out at a given time.  

What the Federal Reserve Means for Home Equity Loans and HELOCs?

Today’s announcement marks the Fed’s fourth consecutive increase of 75 basis points in 2022. 

“The Fed won’t stop until they see consumer spending slow and inflation cool,” says Wagner. “There’s a chance they’ll overshoot the market a bit, but that’s a risk I’d rather them take. If the Fed doesn’t do enough, inflation is going to run out of control.” 

The Fed’s rate hikes are meant to discourage spending and encourage saving. Interest rates for savings accounts and CDs have bumped up with each increase from the Fed. 

Homeowners have been at the middle of a tug of war between record amounts of home equity and the increased cost of tapping into it. After today’s rate hike, the “home equity burning a hole in consumers’ pockets,” is going to lose some of its traction, says Jacob Channel, senior economist at LendingTree. 

While interest in home equity products has been hot for most of the year, that’s expected to change. A recent study from the Joint Center for Housing Studies of Harvard University, predicts a “sharp slowdown” in home improvement projects going into 2023. 

“The US economy is like a big aircraft carrier. It doesn’t react that fast. We’ll need to wait a few months to see the impacts of the Fed’s actions percolate through the system,” says Gupta. “But as the cost of borrowing continues to go up, at some point, there has to be a slowdown in demand.”

How to Get a Home Equity Loan or HELOC

Getting home equity financing is a fairly simple process, but one worth your due diligence. 

“Remember that a home equity loan, as the name implies, is something you have to pay back. So don’t let the dollar signs cloud your judgment,” says Channel. 

Consider how a monthly payment will fit into your budget. Money may already be tight because of inflation, so consider how you’ll be able to balance another monthly payment.

Pay attention to whether you’re dealing with a fixed or variable interest rate. Ask yourself if you’ll be able to afford the monthly payment if rates go up.

Experts recommend shopping around for lenders to see who offers the best rate.

A home equity loan or HELOC comes with a major risk: losing your home. Having a structured repayment plan as well as an adequate emergency fund will help protect your biggest asset. 

Pro Tip

Whether you have an existing HELOC or are looking to open one, keep an eye on the rates. The Fed’s rate hikes most directly impact interest rates for HELOCs, which often have variable rates.

How to Use Home Equity

As long as you’re confident in your repayment plan, the potential uses for home equity loans and HELOCs are endless. By and large, though, homeowners use them for home improvements or debt consolidation

However, experts recommend against tapping into your home equity just because you can. Having a clear purpose and goal is crucial.

“The days of using your home like an ATM, I hope, are behind us,” says Jon Giles, head of direct consumer lending at TD Bank.

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