In an effort to reduce inflation, the Federal Reserve has increased its benchmark rate eleven times in the past seventeen months. Last week, the Fed raised its benchmark rate by 0.25% to a target range of 5.25% to 5.50%. When the Fed’s benchmark rate goes up, interest rates on loans—like mortgages and home equity loans—rise too.
While it’s uncertain whether the Fed will continue to hike interest rates, one thing is clear: Borrowing has become more expensive in the past year. The average home equity loan gained 0.10% since last week, rising from 8.39% to 8.49%. For the 15-year fixed home equity loan, that increase was more steep—the average rate increased 0.15% in the past week.
This week’s home equity loan rates
Here’s a look at this week’s average interest rates for home equity loans, compared to last week’s rates, as well as the best home equity loan rates in your area.
What is a home equity loan?
A home equity loan allows you to borrow against the market value of your house and receive a lump-sum payment in return. For homeowners looking to finance larger projects or costlier expenses, borrowing from their home equity can be an invaluable tool, especially because home equity loans tend to have lower interest rates than other types of loans like student loans or personal loans.
A few instances when you might consider a home equity loan:
- Home improvement projects: Adding a deck to your home or remodeling your bathroom or kitchen can be major value drivers and help you get an even better return on your investment should you decide to sell your home. But these upgrades can also be costly and may not fit neatly into your budget. Using a home equity loan to finance these projects gives you the flexibility to pay for them over time, and you do have the option of using your home as collateral for a home equity loan to cover the cost of those projects.
- College costs: Home equity loans typically have lower borrowing rates, making them an attractive option for covering college costs. The downside: You could also miss out on certain loan protections and forgiveness programs available for federal student loan borrowers. Going this route could help you save, but there are still financial risks involved, so tread carefully.
- Debt consolidation: High-interest debt can be challenging to pay off if you’re paying more in interest each month than toward your principal balance. Using a home equity loan to simplify multiple loan payments and potentially score a lower interest rate could save you tons over the life of your repayment period.
- Emergency expenses: It’s important to have an emergency fund to catch you when you fall, but building up a decent cushion takes time. For example, if you find yourself in a situation where you need to cover an unexpected medical expense, a home equity loan could be a relatively low-cost option for doing so. However, it’s important to come up with a plan for how you’ll repay that loan once all is said and done.
How do I calculate my home equity?
To figure out how much equity you have in your home, you’ll need to calculate the difference between the fair market value of your home and how much you still owe. Say your current outstanding mortgage balance is $150,000 and your home’s current market value is $350,000; that means that you have about $200,000 of equity in your home.
Keep in mind your home’s market value will fluctuate over time as you pay down your mortgage balance, your home’s condition changes, or there are shifts in the housing market and property values in your own neighborhood. Keeping a close eye on your mortgage balance and how your neighborhood and the economic climate around you is changing can give you a more accurate read on how your home equity is changing over time.
Pros and cons of home equity loans
While home equity loans give homeowners an extra avenue for financing large purchases, they are not without their own set of risks. A home equity loan still requires that you use your home as collateral. If you don’t have a solid repayment strategy in place or your home’s equity sees a drastic decline, you could still end up paying thousands in interest or owing more than your property is worth.
Pros
- Access to potentially large sums of money
- Proceeds can be used for any reason
- Fixed rates and predictable payments
- Interest might be tax-deductible
Cons
- Uses your home as collateral, which could put you at risk of foreclosure if you don’t make payments
- If home values fall, you could owe more than the property is worth
- Loan payouts happen only once; you cannot pull future funds as needed
- You could overborrow and end up paying more on interest
Before taking out a home equity loan, weigh the potential risks and rewards to help you determine if it makes the most sense for your long-term financial plan.
Frequently asked questions
What credit score do you need for a home equity loan?
A FICO score of at least 680 is typically required by most lenders for a home equity loan.
Are home equity loan rates higher than mortgage rates?
Home equity loan rates are slightly higher than mortgage rates, because these loans are only paid back after primary mortgages have been fully repaid. If the home goes into foreclosure, the lender holding the home equity loan does not get paid until the first mortgage lender is paid.
Are home equity loans tax deductible?
The interest you pay on home equity loans may also be tax-deductible for the first $750,000 for single filers ($375,000 if married filing separately). To qualify for this deduction, you must use the funds to “buy, build, or substantially improve your home” and itemize your returns, according to the IRS.
