Home equity loan rates tick lower, HELOC rates stand pat

Home equity loan rates decreased a bit this week. The average rate for a five-year, $30,000 home equity loan dropped four basis points, falling to 8.09%, according to Bankrate’s national survey of lenders. Meanwhile, the average rate for a $30,000 home equity line of credit was unchanged, holding at 7.47%.

While lower rates can make borrowing more attractive, Josh Rubin, a real estate broker at Douglas Elliman in New York City, says homeowners need to be thoughtful when they decide to tap into their home’s value. 

“If you absolutely have to tap into your home’s equity because of an individual’s needs, then that is certainly one resource,” he says. “But to look at your home as a proverbial piggy bank for a less critical need, like a second car, a second home, a luxury vacation, jewelry, or clothing items that are not necessarily critical? I wouldn’t recommend going into debt for those items.”

Note: The home equity rates in this survey assume a line or loan amount of $30,000.

What’s driving home equity rates today?

Home equity rates are being driven primarily by two factors — Federal Reserve policy and long-term inflation expectations.

At its latest policy meeting in June, the central bank held the line on interest rates for the fourth consecutive meeting. What was unexpected was that nearly half of the Fed officials said they would support a rate hike if inflation persists. In a statement after the decision, the Fed said inflation still remains elevated relative to its 2% goal. 

What also surprised markets was that, in the statement, the Fed dropped language that might have offered clues about the future direction of interest rates.

Current home equity rates vs. rates on other types of credit

Because HELOCs and home equity loans use your home as collateral, their rates tend to be much less expensive — more akin to current mortgage rates — than the interest charged on credit cards or personal loans, which aren’t secured.

Source: Bankrate national survey of lenders, June 24

While average rates are useful to know, the individual offer you receive on a HELOC or new home equity loan also reflects additional factors, such as your creditworthiness and financials. Then there’s the value of your home and the size of your ownership stake. Lenders generally limit all your home loans (including your mortgage) to a maximum of 80% to 85% of your home’s worth.

Keep in mind: Even if you’re able to secure a favorable rate from a lender, home equity products are still relatively high-cost debt.