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Home equity loan rates are likely to increase in tandem with the increase in the Federal Reserve’s federal funds rate announced today.

Key Takeaways

  • The Federal Reserve raised its benchmark rate by 0.75% to a target range of 3.75% to 4% at its Nov. 2, meeting.
  • Today’s rate hike is the sixth of 2022 in an effort to reduce consumer demand, consumer prices and inflation.
  • Interest rates for all types of loans, including home equity and home equity lines of credit, are expected to increase in tandem with the latest rate increase.

The Fed raised its benchmark rate by 0.75% to a target range of 3.75% to 4% at its meeting Nov. 2, as it did in September. It’s the sixth rate hike this year to combat high inflation in the U.S., which was 8.2% year-over-year in September. The Fed’s inflation target is 2%.

Interest rates on many home equity products like home equity loans and home equity lines of credit (HELOCs) generally change in sync with changes in the Fed’s target interest rate. So, as the Fed increases its rate again, expect to pay more to access your home equity.

Rates on home equity products are generally higher than rates on traditional 30-year mortgages. They vary based on factors like the type and terms of the product and the borrower’s qualifications, including their credit score and amount of equity in the home. As of Oct. 26, 2022, the average rate was 7.29% for a home equity loan and 7.30% for a HELOC, according to Bankrate statistics.

What Are Home Equity Products?

Home equity products allow you to tap the equity in your home and use the money for other purposes, such a home renovation, debt consolidation or college tuition.

For example, a home equity loan provides a lump-sum payment that typically has fixed payments over a set period of time. A HELOC, in contrast, provides a revolving line of credit that homeowners can tap as they need, much like they use a credit card.

Home prices have been significantly increasing since the second quarter of 2020 (although some analysts expect prices to decline in 2023). The result is that homeowners have much more equity. In fact, home equity hit all time high in the second quarter of 2022 in the U.S., according to Black Knight, a mortgage data firm. Home equity levels climbed to $11.5 trillion, up 25% from the year prior.

If home values start to decline and erode equity, as Fannie Mae economists expect will happen next year, borrowers holding HELOCs could have their credit lines frozen. Or, if their home value drops, lenders could limit their HELOC credit line. That’s because a HELOC credit limit is tied to the home’s value. A personal loan can be an unsecured option that isn’t tied to the equity in one’s home and can be leveraged for any purpose, including home improvement.

In addition to facing higher home equity loan rates in the months ahead, you can expect a higher Fed rate to likely increase the cost of other financing, such as traditional mortgages, car loans, and credit card debt.

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