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The average consumer might not be following every signal from the Federal Reserve, but what the central bank does plays a role in what consumers pay for just about everything, including home equity lines of credit (HELOCs), home equity loans and other types of mortgages.
Key takeaways from the Fed’s December meeting
The Federal Reserve hiked its key rate by half a percentage point in December, another large leap for the central bank as it continues to fight inflation. With the increase, expect to see further jumps on rates for financial products, including home equity lending rates.
How the Federal Reserve affects home equity rates
When the Federal Reserve adjusts the federal funds rate, the rate tied to a HELOC moves with it. That’s because a HELOC has a variable interest rate just like a credit card, meaning your monthly payment changes when the rate goes up or down.
Home equity loans, on the other hand, typically have a fixed interest rate, so the rate won’t change once you close the loan.
Fed rate hike history
One of the Federal Reserve’s primary responsibilities is setting the federal funds rate, or the price of borrowing money. A higher rate tends to tamp down demand and spending, while a lower rate has the opposite effect. While the central bank has taken aggressive steps to raise the fed funds rate this year, the rate is still relatively low. Here’s a look at the history of Fed rate hikes since the 1980s.
- Homeowners with mortgages enjoyed a collective increase in $3.6 trillion in equity over the last year, a 27.8 percent increase, according to CoreLogic, with the average homeowner gaining $60,200 in equity. That amounts to close to $300,000 in total.
- At the same time, the amount of homes with underwater mortgages — also known as negative equity — decreased to 1 million properties, representing just 1.8 percent of all mortgages, according to CoreLogic.
- Per homeowner, the median home equity is projected to surpass $129,000 by the end of 2022, according to a forecast from TransUnion.
- HELOC balances added up to total $319 billion in the second quarter of 2022, according to the Federal Reserve Bank of New York.
Why homeowners have more equity today
When you bought your home, your down payment determined how much equity you had out of the gate — say 3 percent or 20 percent. As you pay down your mortgage, you’ll continue to build that equity.
With home values up dramatically, however, many homeowners have accumulated equity much faster than they would have had homes appreciated at the usual historical pace. As of August, home prices were up 13.5 percent year-over-year, according to CoreLogic. While these gains have started to slow, the run-up has given the average homeowner with a mortgage $207,000 of tappable equity, Black Knight reports.
Still, if you’re looking at your climbing home value with thoughts about all you can do with that equity, proceed with caution.
“Just because you have newfound wealth in the form of home equity doesn’t mean you need to do anything with it,” says Greg McBride, chief financial analyst for Bankrate. “Remember that this is not the same as going to the ATM to withdraw your money. You are borrowing, and with rising interest rates, that borrowing is coming at an increasing cost.”
States with biggest home equity gains
Fed rate hikes and home equity FAQ
As of now, you can expect home equity rates to remain elevated in 2023. If you’re making payments on a HELOC, pay especially close attention to rate changes. “These have a variable interest rate, so anyone that has accumulated a large balance is subject to the exposure of rapid interest rate increases,” says McBride.
The housing market is in the early stages of a correction, meaning slower price appreciation and more balanced conditions overall between homebuyers and sellers. This is due in part to rising mortgage rates. This change in the market isn’t indicative of a crash, but slower appreciation will mean slower equity growth for homeowners. “Home prices are unlikely to come down,” says McBride. “They simply level off. There may be isolated zip codes where prices could be subject to a pullback, but that is very much the exception rather than the rule.”
The next Federal Reserve meeting concludes Feb. 1, and there’s a likelihood of another rate increase — though, like the December one, it may be smaller than the previous hikes of 2022. The central bank will take a close look at inflation data and other factors to determine how much to raise rates.
There are a number of ways to access your home’s equity, including a cash-out refinance, which replaces your existing mortgage with an entirely new loan for a larger amount, ideally at a lower rate; a home equity loan; or a HELOC. A home equity loan is a type of second mortgage, while a HELOC is a revolving line of credit. All three options allow you to access funds based on your equity stake. Because of the climb in fixed interest rates this year, HELOCs are much more in-demand now compared to cash-out refinances.
You can estimate your home equity simply by subtracting the amount you still owe on your mortgage from your home’s value. The most reliable way to determine your value is to have a professional appraisal. If you’re getting any kind of mortgage or home equity loan, your lender will require this step.
There are two key differences between home equity loans and HELOCs. First, a home equity loan comes with a fixed interest rate, so your payment will never change, while a HELOC has a variable interest rate that can make your payment go up or down from month to month. Second, a home equity loan is distributed in one lump sum, while a HELOC allows you to access money as you need it. If you’re deciding between the two, Bankrate’s home equity loan vs. HELOC calculator can help guide your decision.