It has been a historic year characterized by low interest rates and quickly rising home prices. The housing market should find a more even keel in 2021, but homeowners still stand to benefit from those higher valuations, because their home equity will remain high while rates on outstanding balances should stay pretty competitive throughout the year.
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.
Bankrate’s 2021 home equity forecast
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.
“Homeowners with existing home equity lines have no need to worry about rates rising with the Fed committed to ultra-low short-term rates,” says Greg McBride, CFA, Bankrate chief financial analyst.
“The average rate available for new borrowers will be lower by year-end as home equity lenders trot out new introductory offers, particularly later in the year should mortgage refinance activity wane. On home equity loans, lenders continue to shy away from this product. Those that remain will get more competitive as the year rolls along.”
He predicts a 4.61 percent average rate on home equity lines of credit (HELOC) for the year and a 5.05 percent average rate on home equity loans.
What happened to home equity rates in 2020?
Home equity borrowing rates went down in 2020 like most other kinds of loan rates. Many lenders tightened credit availability as applications for new loans soared, so some homeowners may have had to dig a little more to find an institution that would extend a home equity product.
Those who were able to secure a HELOC or home equity loan benefited from low interest rates. A spike in home renovations throughout 2020 may have been a sign that a large share of homeowners were tapping their home equity.
What will drive home equity rates in 2021?
Tight housing supply will probably mean home values remain high, which will boost equity for most current owners. The ongoing low-interest-rate environment across the board will mean that 2021 should be a good year for those looking to tap their home equity, especially later in the year if lenders extend more credit availability and introduce promotional offers to new borrowers.
The Federal Reserve has pledged to keep its fed funds rate at near zero through 2023 as the economy makes a slow recovery from the pandemic. This means low borrowing costs will prevail for home equity loans.
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 — especially now, when many lenders aren’t extending home equity financing at all.
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.