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Are you planning to remodel your home or trying to reduce high-interest credit card debt? If you’re a homeowner, you might have considered taking out a home equity loan to pay for these projects. But as inflation rises, home equity loan interest rates rise too.
As mortgage rates and—by extension—home equity rates rise, you may want to look at the trends to determine whether the timing is right for a loan application.
Key Takeaways
- Home equity loans are secured loans using your house as collateral. If you fail to repay your loan, the home could be foreclosed on and repossessed.
- Home equity loan rates are typically slightly higher than mortgage rates.
- Mortgage rates are anticipated to decrease in 2024 and 2025, but rates can go up temporarily as the market recalibrates following years of rate hikes.
What Is a Home Equity Loan?
A home equity loan is based on the equity you’ve built in your home. Equity is determined by the current value of your home minus the amount you owe on your mortgage. Your equity can ebb and flow since home values depend on market conditions, such as available stock and developments in the area.
A home equity loan uses that equity as collateral for the amount you want to borrow. Typically, you cannot borrow the total amount of the equity available—80% is the standard rule of thumb. Home equity loans are secured since they have physical collateral attached and come with more attractive interest rates than other options, such as credit cards or personal loans.
In addition to the amount you borrow, you’ll also pay interest on the loan and closing costs that cover the preparation of the loan, origination fees, and recording fees. Some lenders offer the option of paying points or prepaid interest at closing. This can lower your overall repayment amount but will increase your closing costs. You can choose how many points to take, if any, with your lender.
Lenders will allow you to lock in an interest rate. Doing so allows you the time to go through the process of applying for a home equity loan.
How Are Interest Rates Changing in 2024?
Starting in July 2021, interest rates began rising to their highest in decades, a direct response to the Federal Reserve’s actions to lower inflation. Freddie Mac, a government entity created to fund mortgage lenders, tracks mortgage rates. Its Primary Mortgage Market Survey (PMMS) tracks mortgage interest rates weekly.
As of October 17, 2024 the interest rate for a 30-year fixed-rate mortgage averaged 6.44%, down from 7.63% compared to the same time last year. Keep in mind that home equity rates are typically higher than conventional mortgage rates.
Economists at Freddie Mac expect inflation to continue to cool but remain slightly above the Federal Reserve’s target of 2%. Although mortgage rates dropped to their lowest level in Sept. 2024 following the Fed’s September rate cut, rates began climbing again in October following a strong jobs report. Freddie Mac economists expect mortgage rates to ease very gradually over time.
How Do Mortgage Rates Affect Home Equity Rates?
Although the government doesn’t track home equity interest rates specifically, they are closely tied to mortgage rates. Since a home equity loan is considered a second mortgage, if you default on your loan and go into foreclosure, the proceeds from the sale of your home would go to your primary mortgage first and then the home equity loan. Home equity loans incur higher interest rates to protect lenders from investment loss.
So, as the Federal Reserve is expected to continue cutting rates, expect mortgage rates and—by extension—home equity rates to decrease. There will be fluctuations—mortgage rates increased in Q4 of 2024 but were lower than the previous year.
How Does the Federal Reserve Rate Affect Mortgage Rates?
The Federal Reserve sets the federal funds rate. The federal funds rate is the rate at which banks loan each other money in short-term loans. The federal funds rate doesn’t directly impact mortgage rates, but banks use it as a benchmark for lenders—they use this rate and then build in leeway for fees and their profit. Typically, when the federal funds rate rises, so do mortgage rates.
Is It Still Affordable to Get a Home Equity Loan?
Affordability is subjective. Objectively, a home equity loan still has a much lower interest rate than other types of consumer credit, such as credit cards. And, as a fixed-rate loan, you don’t have to worry about rates rising later with a home equity loan. Historically, while the 2024 rates are not the cheapest we’ve seen, they are also not the most expensive.
Can the Interest Rate on My Home Equity Loan Change?
The Bottom Line
Home equity rates are around the same as they were this time last year, but there have been ups and downs, making it hard to predict when low rates will stick around. Keep in mind that even current rates are a bargain compared to other forms of debt. If you need home repairs or want to pay down even higher-interest debt, a home equity loan could be the answer.