Interest rates for home equity loans and lines of credit will rise slightly in 2022, with the the Federal Reserve expecting to raise rates twice this year. Bankrate chief financial analyst, Greg McBride, predicts that this rise will have varying effects on existing borrowers versus new borrowers.

For home equity lines of credit (HELOCs), McBride predicts that “for existing borrowers, the rate is going to mimic whatever the Fed does. If the Fed raises rates twice, expect your rate to be half a percentage point higher.” New HELOC borrowers can expect to see fewer introductory and promotional rates offered by lenders due to the predicted rise in rates. The average HELOC interest rate is expected to raise more than half a percentage point, with the predicted average at 5.05 percent by the end of 2022.

Home equity loans are offered at fixed rates, so if you are an existing home equity loan borrower, you do not have to worry about your interest rates increasing. If you are in the market for a home equity loan in 2022, you can expect, “the average rate trending higher in response to the Fed, rising more modestly, moving a quarter of a percentage point, ending the year at 6.25 percent,” says McBride.

What happened to home equity rates in 2021?

The Federal Reserve’s federal funds rate directly impacts market rates for home equity products. In 2021, interest rates for both home equity loans and lines of credit have remained fairly low. The average home equity loan interest rate was 5.29 percent at the beginning of 2021 and was 5.96 percent by the end of the year. The average home equity line of credit interest rate was 4.7 percent at the beginning of 2021 and was 4.28 percent by the end of the year.

More borrowers will take advantage of their home equity

Despite the slight rise in HELOC interest rates, more people are predicted to take advantage of their home equity in 2022. Real estate prices have been on the rise, making it a great time for homeowners who have already refinanced their mortgages to take out HELOCs for home improvement expenses. People’s homes will have greater equity in 2022 due to rising real estate prices, and mortgage refinancing rates are dropping off. Greg McBride predicts that “As mortgage refinancing rates drop off, more people are going to be using their home equity.”

This rise in individual home equity will likely have less of an impact on home equity loan application rates, as HELOCs are much more flexible and better-suited for utilizing high home equity for home improvement and other investments. Home equity loans remain an attractive option for debt consolidation. Additionally, borrowers who have not refinanced their mortgage are still better off refinancing before considering a HELOC.

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 raised by at least half a percentage point
  • 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 utilize home equity with a HELOC
  • Borrowers looking to consolidate debt should consider a home equity loan