Interest rates for home equity loans have remained fairly low in 2021, and that’s expected to hold true for the remainder of the year as the Fed keeps interest rates low and lenders roll out competitive introductory offers.
Loans that leverage home equity broadly fall into two categories: home equity loans and home equity lines of credit (HELOCs). Either of these lets you take advantage of your home equity — the value of your home above what you owe on your mortgage — to secure money relatively cheaply, because you’re putting your home up as collateral if you fail to pay.
Homeowners can also tap their home equity through a cash-out mortgage refinance, but that’s priced differently because the borrowing is rolled into the primary mortgage on your property.
What has happened to home equity rates in 2021?
The benefits of home equity borrowing is closely tied to the rates on offer. The large majority of home equity products have rates that float with market rates set by the Federal Reserve through its federal funds rate, which in turn powers the indexes that home equity products are tied to.
“In the first half of 2021, there hasn’t been much movement in rates for home equity loans with the average rate rising from 5.29 percent at the beginning of the year to 5.36 percent now, ” says Greg McBride, CFA, Bankrate chief financial analyst.
“As for rates available to new borrowers, the average HELOC has fallen notably from 4.7 percent at the beginning of the year to 4.11 percent by mid-year as lenders have rolled out attractive introductory offers or resumed offering the product that was shelved in the early stages of the pandemic,” he adds.
Bankrate’s 2021 home equity forecast
Low rates should continue through the end of the year, with the Fed holding short-term rates near zero.
McBride predicts that there won’t be any wholesale changes in the coming months and expects home equity loan rates, on average, to remain between 5.25 percent and 5.5 percent during the second half of the year.
How to get a HELOC or home equity loan
Applying for a HELOC or home equity loan is a lot like applying for any other personal loan. You’ll need to make sure your credit is in order and supply your lender with financial documents to prove you can afford the loan. As always, it’s a good idea to shop around with multiple lenders.
Keep in mind when you’re applying that there are some key differences between a HELOC and home equity loan. Generally, HELOCs are more flexible: They work like a credit card, where you can borrow up to a certain maximum, while home equity loans are a lump-sum payout. However, HELOCs also usually have variable interest rates, so their monthly payments can be less predictable, while home equity loans usually have fixed interest, which can be easier on your budget.
In general, lenders will let you borrow up to 80 percent of your home’s value, minus outstanding mortgage balances. So, if you have a $300,000 house with $150,000 left on the mortgage, you’ll have $150,000 in home equity, and the average lender will let you borrow $90,000 against your home in that case.