Planning a home remodel or trying to pay off high-interest credit card debt? If you’re a homeowner, you may have considered funding these projects through a home equity loan. But as inflation rises, so do home equity rates. With mortgage rates and home equity rates rising, you should look at trends to determine if it’s the right time to apply for a loan.
Central thesis
- A home equity loan is a secured loan with your home as collateral.
- Interest rates are usually slightly higher than mortgage rates.
- Mortgage rates are rising fast as the Federal Reserve raises the federal funds rate to fight inflation.
What is a Home Equity Loan?
Home equity loans are based on the equity you have built up in your home. Equity is determined by the current value of your home minus the amount you owe on the mortgage. Your assets can be volatile and liquid as property values depend on market conditions such as: B. Available inventory and developments in the area.
Home equity loans use that equity as collateral for the amount you want to borrow. In general, you cannot borrow all of your available assets – 80% is the standard rule of thumb. 1 Home equity loans are secured because they come with physical collateral and offer more attractive interest rates than other options such as credit cards or personal loans.
In addition to the amount borrowed, you will also be required to pay loan interest and settlement fees, which include loan preparation, setup and entry fees. Some lenders offer the option to pay points or prepaid interest at closing. This can lower your total repayments but will increase your billing costs. You can choose how many points (if any) you want to receive from the lender.
How will interest rates change in 2022?
Interest rates are rising — and fast. Freddie Mac, a government agency that funds mortgage lenders, tracks mortgage rates. Their Prime Mortgage Market Survey (PMMS) tracks mortgage rates on a weekly basis.
On January 6, 2022, the average rate on a 30-year fixed-rate mortgage was 3.22%. Within a week, the ratio had risen to 3.45%. To illustrate the impact of this jump, look at the different payment methods—for a $240,000 30-year fixed-rate mortgage, a 3.22% rate would mean a monthly payment of $1,041. Raising the interest rate to 3.45% would result in a payment of $1,071.
While $30 might not seem like a lot, the difference will get bigger over time. At an interest rate of 3.22%, the mortgage would accrue $134,597 in interest. At an interest rate of 3.45%, the same mortgage would accrue $145,567 in interest.
Interest rates only increase in one year. Starting in May 2022, the interest rate peaks at 5.30% before easing slightly to 5.25%. That $240,000 mortgage? At 5.25%, the monthly fee is $1,325 and the interest is $237,104.
These increases are directly related to the Fed’s measures to reduce inflation. In May 2022, they implemented the second of two rate hikes this year, bringing the policy rate to 1%. 4 At least two more rate hikes are expected by the end of the year. Since lenders use prime rates as the basis for setting mortgage rates, this rise means borrowers’ rates will rise as well.
How Do Fed Rates Affect Mortgage Rates?
The Fed sets the federal funds rate. The federal funds rate is the rate at which banks lend to each other in the form of short-term loans. The federal funds rate doesn’t directly affect mortgage rates, but banks use it as a benchmark for lenders — they use that rate and then build a margin for fees and profits. When the federal funds rate rises, mortgage rates typically rise as well.
How Does Mortgage Interest Affect Equity Interest?
Although the government doesn’t specifically track home equity ratios, they are closely related to mortgage rates. Because a home equity loan is considered a second mortgage, if you default on your loan and start foreclosure, the proceeds from the sale of your home will go toward your primary mortgage first and then your home equity loan. Home equity loans have higher interest rates to protect lenders from losing their investment.
Mortgage rates are expected to rise, and with them, home equity rates, as the Fed considers further rate hikes. While there are weekly declines, prices are trending steadily higher.
Is Home Equity Loan Still Affordable?
Affordable stuff is subjective. To be fair, home equity loans still have much lower interest rates than other types of consumer loans, such as mortgages. B. Credit Cards. As a fixed-rate loan, you don’t have to worry about interest rates rising later when you apply for a home equity loan. Historically, the 2022 tariffs may not be the cheapest we’ve seen, but they’re by no means the most expensive.
Can my home equity loan interest rate change?
No Once your loan is finalized, your interest rate will be set during your home equity loan. In contrast, a home equity line of credit (HELOC) operates at an adjustable interest rate. In times of volatility, a fixed rate is much better for your bottom line.
Final result
Home prices are rising – if you’re considering a loan, don’t wait. At least two more rate hikes are expected this year. Therefore, the sooner you set your interest rate, the better. While it may be painful considering interest rates that have doubled from last year, even current rates are a steal compared to other forms of debt. If you need home repairs or want to pay off your debt with a higher interest rate, now is the perfect time to take the plunge.
