Interest rates for home equity loans and lines of credit will keep rising in 2023 as the Federal Reserve continues to battle inflation.

“As long as the Fed is active, HELOC rates are going to continue to march higher,” says Greg McBride, CFA, Bankrate chief financial analyst. “The important point for homeowners who have a home equity line is that if the Fed raises interest rates another percentage point, your home equity line is going to go up another point.”

Bankrate’s forecast for home equity rates

The average rate for home equity lines of credit (HELOCs) stood at 7.62 percent as of Dec. 28, according to Bankrate’s national survey of lenders. McBride expects that number to reach 8.25 percent by the end of 2023.

For fixed-rate home equity loans, the average rate was 7.87 percent for 15-year loans and 7.93 percent for 10-year loans, according to Bankrate’s survey. McBride expects rates on home equity loans to reach 8.75 percent by the end of the year.

That’s because HELOCs typically carry variable rates that are pegged to the prime rate or another benchmark. Home equity loans, on the other hand, typically come with fixed rates.

Looking back at what happened to home equity rates in 2022

The Fed’s federal funds rate drives market rates for home equity products. In 2022, the central bank raised interest rates seven times. Those aggressive moves from the Fed caused rates for both home equity loans and lines of credit to soar.

The average home equity loan interest rate was just above 6 percent at the beginning of 2022 and was approaching 8 percent by the end of the year. The average HELOC interest rate was 4.25 percent at the end of 2022 and flirted with 8 percent by the end of the year.

Despite higher rates, home equity loans remain attractive

HELOC rates have soared, yet HELOCs and home equity loans remain attractive to homeowners for a simple reason: Mortgage rates soared in 2022.

When mortgage rates fell to historically low levels, homeowners could tap their home equity through cash-out refinances. The move was a no-brainer: Tapping equity at a 3 percent rate was clearly a good move, so long as the borrower spent the proceeds on reasonable investments such as remodeling the kitchen or padding the retirement account.

But mortgage rates soared in 2022, and that changed the calculus for refinancing. Homeowners no longer wanted to reset their entire mortgage just to pull a small chunk of equity from their homes.

As long as the Fed is active, HELOC rates are going to continue to march higher.

— Greg McBride

HELOCs are suited for using high home equity for home improvement and other investments. Home equity loans remain an attractive option for debt consolidation. However, the rise in rates for all home equity products has created a new reality: This is no longer cheap money, McBride warns.

Important next steps for home equity borrowers

If you are interested in taking out a home equity loan or line of credit this year, consider the following:

  • Existing HELOC borrowers will likely see rates continue to climb.
  • Existing home equity loan borrowers do not have to worry about rising rates.
  • New borrowers for either product will see slightly higher rates and fewer promotional deals for new borrowers.
  • Homeowners who have finished refinancing their homes are in a great position to tap home equity with a HELOC.
  • Borrowers looking to consolidate debt should consider a home equity loan.