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Home Equity Loans and Lines of Credit (HELOCs) are back.
When mortgage rates were below 4% for the past two years, it made a lot of sense to refinance your mortgage and get some money that way if you wanted to turn some of the equity in your home into cash.
Now, the average rate on a 30-year fixed mortgage is above 5%, and experts say it no longer makes sense to blow what good rate you could have on your primary mortgage to do a cash-out refinance. “Why would you want to interrupt that? You wouldn’t,” says Jim Albertelli, CEO of Voxtur Analytics, a real estate technology company.
Instead, there are other ways to get home equity. “What you would want to do is use some of that equity in your home and do it through a [home equity loan] or a home equity line of credit and leverage that for home improvements or whatever,” says Albertelli.
Home equity loans and lines of credit (HELOCs) are often called second mortgages because you are borrowing against the value of your home that is not covered by your first mortgage. They haven’t been popular for years, partly because of low mortgage rates and partly because of the lax lending practices that involved them and helped precipitate the foreclosure crisis 15 years ago. But mortgage rates are no longer so low and home equity loans are now much more regulated, leading to a resurgence, experts say. Rob Cook, vice president of marketing, digital and analytics for Discover Home Loans, says the market is up 50% year over year.
“This product hasn’t been appreciated for 15 years,” says Vikram Gupta, director of fair housing at PNC Bank. “Is it now the return of home equity?”
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 Loans and HELOC Rates Through 2022
vikram guptadirector of fair housing at PNC Bank
For HELOCs, the variable rate generally follows the prime rate, which follows short-term rate changes by the Federal Reserve, Gupta says. “That part of the equation, rates will go up. It is a variable rate. We are in an environment of rising rates. It is linked to an index that is going up, ergo, the rate will go up.”
Jim AlbertelliCEO of Voxtur Analytics, real estate technology company
Expect home equity rates to end up a bit higher than the 30-year fixed mortgage rate, says Albertelli. “You can expect your home equity line of credit or [home equity loan] be somewhere in the 6.5 to 8% range as we go towards the end of this year and next.”
steal cookVice President of Marketing, Digital and Analytics at Discover Home Loans
Home equity rates could reflect the rising trend in mortgage rates, but fears of a recession could dampen those increases, Cook says. “My view is that rates will be flat or trend higher over the course of this year.”
brand hinshawco-founder and president of Candor Technology, a mortgage technology company
Home equity rates could rise 50 to 100 basis points this year, says Hinshaw. “The cousin [rate] it will continue with those rate increases that the Fed issues.”
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 cash in a lump sum and then pay it back with monthly payments, similar to 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 whenever you need it, paying only interest on the money you’ve borrowed. outside. Like a credit card secured by your home.
When choosing between a home equity loan and a HELOC, consider how soon you’ll need the money and whether you need it all at once. If you don’t need it all at once, a HELOC might be a better deal.
So how do you decide? That has to do with your personal financial situation and what you plan to use the money for, says Mark Hinshaw, co-founder and president of Candor Technology, a mortgage technology firm.
A HELOC makes more sense if you’re not yet sure exactly what you’ll spend the money on or don’t plan to spend it right away, says Hinshaw. If you opted for a home equity loan instead of a HELOC in that situation, you’d have the money saved and you’d be paying interest on cash that isn’t being used yet.
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’re going to do home improvements, there’s a particular amount they want to spend, you’re not interested in spending money on other things, and you’re more conservative and risk-averse when it comes to interest. rates, then I would say that the loan would be the best option for you.”
How are home equity and HELOC rates set?
HELOC rates are fairly simple, in that they generally have two components: a variable portion that moves with an index, usually the prime rate published by the Wall Street Journal, and a margin added (or subtracted) by the lender, which does not change. . It could be the prime rate plus 75 basis points, or two percentage points, for example, says Gupta. With the prime rate at 4% in early June, that would mean a HELOC rate of 4.75% with a 75-point spread for the bank.
For example, the average rate for a $30,000 HELOC on June 1, 2022 was 4.35%, according to a survey by Bankrate, which like NextAdvisor is owned by Red Ventures.
Interest rates for home equity loans, as a fixed-rate product, are set more like mortgage rates, with a variety of factors going into them. These include the cost for the bank to get the money, the lender’s operating expenses, its profits, and a margin to cover the risk that you, the borrower, won’t pay it back, says Hinshaw. Compared to a variable-rate HELOC, a fixed-rate loan “will end up being a little more expensive because they’re taking on interest rate risk,” she says.
The median rate for a 10-year, $30,000 home equity loan was 6.73% on June 1, 2022, according to Bankrate.
Why Consider a Home Equity Loan or HELOC?
Homeowners who have 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 like personal loans and credit cards.
“It allows people to keep the low rate they have on their primary mortgage,” says Cook. “It’s a good financial vehicle from that perspective.”
Such a loan 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 prices skyrocketing and homes on the market for just a few days in many parts of the country. “For many consumers it makes sense to stay where they are in their 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 ultimately don’t pay, there’s a risk of foreclosure,” says Cook.
That risk is why interest rates on debt secured by your home are lower than on unsecured debt, Gupta says. Lenders have the ability to recoup their losses by taking and selling your home if you default. “That risk always remains when you use your home, but if used wisely and sensibly, it’s a more cost-effective way compared to unsecured loans,” she says.
Knowing that risk, be wise about what you do with home equity loans and lines of credit. Experts advise that it’s usually best to borrow for necessities and things like major home improvement products that will increase the value of your home.
As for the risk that you borrow too much and can’t repay, experts say you should maintain a cushion of capital that isn’t tied up in debt and work with lenders who are doing their due diligence on your loan. Home equity loans caused problems 15 years ago, but regulations have increased and banks should no longer lend lightly. “Even if the borrower wanted more, lenders will have strict limitations,” says Gupta.