If you’re a homeowner, odds are you’re sitting on a source of cash right now.
As housing prices have soared, so has the worth of home equity (the portion of the home you own outright, not financed). U.S. mortgage-holding homeowners collectively have $11 trillion in tappable equity as of May 2024. That translates to an average of $206,000 per borrower, up from $185,000 at the same time last year.
And homeowners are tapping into that stake, borrowing against it for ready money. In 2022 and 2023, the amount of home equity loans and home equity lines of credit (HELOCs) originations kept rising, hitting some $502,000 worth of financing in Q4 2023 — up from $390,000 in Q4 2020, according to TransUnion’s Q1, 2024 Quarterly Credit Industry Insights Report.
This is happening despite elevated interest rates. Interest rates on home equity loans have increased and remained high for the last six months, making them a pricier proposition. “Homeowners are sitting on a mountain of equity thanks to rising home values, but tapping that equity is no longer a low-cost source of funds,” says Greg McBride, Bankrate’s chief financial analyst. “Home equity loan rates are 8.6 percent on average and home equity lines of credit average 9.17 percent, with many carrying double-digit interest rates.”
So, is tapping your home equity a good idea? Depends on who you ask and what it’s for. Let’s crunch some numbers.
Bankrate insights
Despite high rates, a recent survey by First Close, a fintech provider of mortgage and home equity data, found that 56 percent of respondents would access their home equity for a home renovation project and 49 percent would use it to consolidate debt.
How did we get to high rates on HELOCs and home equity loans?
First, what’s behind the roller-coaster ride in home equity rates? “We’ve been in a quite unusual environment over the past few years ultimately harkening back to a short, but severe recession related to COVID-19 pandemic lockdowns,” explains Mark Hamrick, Bankrate’s Senior Economic Analyst.
During the pandemic, interest rates plunged to historic lows: Hovering in the 4-to-5 percent range, home equity loans and home equity lines of credit (HELOCs) were incredibly affordable. But when the Fed began raising its benchmark interest rate in mid-2022, in its efforts to curb inflation, home equity products began to follow suit.
The week of Nov. 8, the average rate on a HELOC topped 10 percent — an over 6 percent increase since March 2022 — according to Bankrate’s survey of the nation’s largest lenders. It’s fluctuated since then, but stayed mostly above 9 percent. Home equity loans are high, too, also hovering around 9 percent.
Home equity loan and HELOC rates have also bounced around in relation to each other. Prior to the pandemic, HELOC rates were higher than home equity loan rates. But Bankrate’s rate survey data shows that, in early 2020, HELOCs became more affordable for a period of over two years. Rates between the two products stayed comparable until November 2023. For the past six months, HELOC rates have remained above home equity loan rates, sometimes by almost a full percent.
These variances in rates are in part due to the indices that the rates are tied to. “HELOCs are short-term, akin to CD rates,” says Lawrence Yun, NA chief economist. “In contrast, home equity loans are tied to longer-term rates, and commonly used for major expenditures like remodeling.”
As of May 22, here’s where the average home equity loan and HELOC rates stand:
| HELOC | 10-year home equity loan | 15-year home equity loan |
|---|---|---|
| 9.16% | 8.77% | 8.75% |
How rising interest rates impact home equity borrowers
Currently, the average home equity loan and HELOC rate ranges from around 7.5 percent to 13 percent, depending on the loan terms, the lender and your finances, according to Bankrate’s survey of the nation’s largest lenders. However, just three years ago, these averages were closer to 5.50–6 percent.
Let’s break down how this rise in rates affects your monthly payment and the total interest you pay. Here’s a table showing the differences for a $50,000 10-year fixed-rate home equity loan, with one at 6 percent and another at 9 percent:
| $50,000 10-year home equity loan | 6% interest | 9% interest |
|---|---|---|
| Monthly payment | $555 | $633 |
| Total interest paid | $16,612 | $26,005 |
If you had a 9 percent interest rate, your monthly payment would be $78 more than with a 6 percent rate. And the total interest you would pay over the loan’s lifetime is $26,005 — almost $10,000 more.
Home equity loans may be more difficult to get
Not only do high interest rates make it harder to afford a loan, they also make it more difficult to qualify for one. “As rates have increased, it’s increased the cost of carrying that debt, so the qualifying payment [the amount of income you need for an acceptable debt-to-income (DTI) ratio] has increased and so it has become more difficult,” says Adam Boyd, the head of home equity, credit card and unsecured lending at Citizens Bank.
51%
Denial rate for HELOC applications as of Q3 2023
Source: Home Mortgage Disclosure Act
Why are home equity loans popular now?
Still, if you have good credit and a solid source of income, you may find institutions eager to extend you home equity financing. The rapid rise in mortgage rates means primary loans aren’t financially viable for many and, with many borrowers’ primary mortgages locked in at a low rate, the interest in cash-out refinances (once the go-to equity-tapping option) is pretty low too. So, “you’re seeing a lot of non-bank mortgage companies offering home equity lines as a way to keep business coming in the door,” says Haynie.
Starting in mid-2022, the rise in mortgage rates made home equity loans and home equity lines of credit (HELOCs) more viable than cash-out refinances. That’s because many borrowers’ primary mortgages were locked in at historically low rates; rather than surrender a 3 percent loan in a refi, taking out a second mortgage or lien made more financial sense.
Despite the elevated rates, a home equity loan or a HELOC may still be a smart option, especially if you need the money to make home renovations or repairs. The interest on the loan can be tax-deductible in that case (if you itemize deductions on your tax return). Also, home equity products offer longer repayment terms — as much as 30 years — and lower rates than personal loans and credit cards.
HELOC vs. home equity loan: What’s better right now?
If you have to choose between a HELOC and a home equity loan, there are a few aspects that can make a HELOC more attractive in today’s market:
- Variable rates: “Borrowers that take a HELOC today will likely benefit from the rate cycle as rates inevitably start to come down,” says Boyd. That means your HELOC rate could drop, whereas, if you have a fixed-rate home equity loan, your rate stays the same.
- Speed of funding: It can take 45 to 60 days or more for a home equity loan to close. “With many lines [of credit], we’re able to originate in two weeks or less,” Boyd says. He adds that this speed is not uniform among lenders, so ask about funding time when shopping for a loan.
- Flexibility: HELOCs offer a more adaptable approach. “You have the ability to draw down on it and use it for whatever you were going to use it for, then you can pay it back like a credit card,” says Ron Haynie, the Senior Vice President of Housing Finance Policy for the Independent Community Bankers of America. “Most HELOCs, you’re paying interest-only during the draw period,” he adds. With a home equity loan, you’re getting a lump sum and start paying it back in full immediately.
Still, “fixed-rate home equity loans are good if you have a specific purpose,” Haynie says — or a specific sum you know you need, like to pay off all outstanding credit card balances. And the loans do have lower interest rates right now than HELOCs.
Drawbacks of home equity borrowing
Of course, home equity products come with caveats too — and this high-rate environment only intensifies the risk. For starters, they use your house as collateral. “Home equity loans and HELOCs are tied to your home, so if you can’t make payments you’re at risk of losing your house,” says Certified Financial Planner Chloe Moore, founder of Financial Staples, a virtual, fee-only firm. This can also put you in a bind if home prices drop significantly: In between your first and second mortgages, you could owe more money than what your home is worth.
“Consider why you’re wanting to use your home equity,” Moore adds. “If it’s for a home renovation project, could it wait? If you’re consolidating debt, do you have a solid plan to repay the loan and ensure you don’t incur more debt over time? Are you at risk for being laid off, and if so, do you have an emergency fund to cover a loss of income?” All of these things need to be carefully considered before depleting an equity stake.
In short, “be careful,” says Haynie. “Use your equity wisely and make sure that the reason for you tapping this equity is a good reason.”
If you are going to borrow from your home equity, understand … the cost of that borrowing is the highest in more than 20 years.— Greg McBride, CFA , chief financial analyst for Bankrate
Alternatives to HELOCs and home equity loans
Personal loans
Instead of tapping into your home equity, you could consider getting an unsecured personal loan. They aren’t tied to your home, so you don’t risk losing it if you can’t repay the loan. They’re also convenient and quick, with funding coming in as soon as one day.
But: “that typically comes at a higher cost,” Boyd says. “The average rate you get on a personal loan is generally going to be higher than what you can get on a home-secured product.” For instance, as of May 22, the average rate of an unsecured personal loan is 12.21 percent. Compare that to a HELOC at 9.17 percent and a 10-year home equity loan 8.77 percent.
Also, unsecured personal loans also don’t generally allow you to borrow as much. “Unless they’re in a very good financial situation …most people aren’t going to get $50,000 or $100,000,” Haynie says.However, “if you have really good credit and you’re borrowing $15,000 or $20,000, the personal loan might be the better route to go,” says McBride.
For those with exceptional credit and high income, some lenders that do offer unsecured personal loans for $100,000 or more.
Cash-out refinance
A cash-out refinance could be another option. Refinance rates remain lower than home equity loan rates and may not be that bad a deal, depending on how old your primary mortgage is, and how sizable your ownership stake.
For instance, say you are halfway through your 30-year loan term, owe $50,000 on a home valued at $400,000 and your current mortgage rate is 6 percent (the average 30-year-fixed mortgage rate back in 2008). As of May 22, you can get a 15-year cash-out refinance for 6.78 percent and pull out $80,000 in equity. So, it may make more sense for you to refinance than to take out a home equity loan or HELOC at a significantly higher rate.
Bottom line on home equity loans today
Proceed with caution before getting a HELOC or home equity loan right now. “Look at what options you may have, including not doing it,” says McBride. “If you do borrow, you’ve got to have a firm plan for paying it back.”
Not all borrowers have the option to wait for rates to drop, however. For instance, your home may need significant repairs or remodel work sooner rather than later. Or you’d really like to clear that credit card debt once and for all.
If you’re trying to tap your home equity right now, compare a variety of lenders and products. These rates change frequently and can vary significantly depending on the lender and your financial profile.
Also, “as you do research, don’t just focus on the advertised rate,” Adam Boyd advises. “Talk with the lender and understand what the other stipulations are attached to that rate just to make sure you’re considering all costs associated with the loan.” This way, you can better choose the right home equity product for you — whether it’s now or in the future.
