Home equity loans and home equity lines of credit — typically called HELOCs — have been in high demand in recent years. These allow you to borrow against your house, turning your ownership stake into cash, which you can then use to cover home repairs or renovations, consolidate debts or pay for virtually any expense you can think of.
At its meeting in September, the Federal Open Market Committee voted to reduce the federal funds rate by 0.50 percentage points, a long-awaited change that could eventually mean lower interest rates for home equity loans and HELOCs.
Should you consider tapping yours? That likely depends on what interest rate you can get—and how that compares to other home equity products such as HELOCs and cash-out refinancing. Here’s what you need to know about home equity loan rates to make the right decision.
Current home equity rates
Rates on home equity loans have sat in the mid-to-high 8% range for a while now. In September, the average home equity loan carried an 8.49% rate, according to Bankrate. That’s down slightly from the 8.61% rate seen in May.
The slight dip is likely due to the Federal Reserve’s choice to start reducing interest rates at its September meeting. The central bank increased its benchmark federal funds rate 11 times in 2022 and 2023, but had kept rates steady since July of last year. The month marks the first decrease in rates since 2020.
Here’s a look at where average home equity loan rates stand as of September:
Bankrate
Home equity loans are a type of second mortgage, meaning if you default on the loan, the lender will only get paid if your primary mortgage is satisfied. As a result, home equity loan rates tend to be higher than rates on first mortgages — usually by at least two percentage points. The average rate on a first-lien 30-year mortgage was 6.20% in mid-September.
What’s next for home equity loan rates?
Where home equity loan rates head next depends on the Fed’s future policy moves. The central bank decreased rates at its most recent meeting, and if inflation remains low and unemployment data holds steady, it could opt for additional rate reductions later this year.
“As the economy evolves, monetary policy will adjust in order to best promote our maximum employment and price stability goals,” Federal Reserve Chair Jerome Powell told reporters at a September 18 press conference. “If the economy remains solid and inflation persists, we can dial back policy restraint more slowly. If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we are prepared to respond.”
The CME Group FedWatch Tool, which uses futures pricing data to gauge expected Fed policy moves, shows a Fed rate cut is likely at both the November and December meetings.
Should those rate cuts happen, it will likely mean further drops in home equity loan rates as well.
What determines home equity loan rates?
The Federal Reserve’s moves are one important factor when it comes to home equity loan rates, but there are other influences, too. Demand for home equity loans and mortgages play a role, for instance, as does investor demand for mortgage-backed securities.
Home prices matter, too. Because home equity loans represent second liens, lenders need to take extra precautions to ensure they will get paid in the event of default. Lenders tend to be a lot more comfortable when home prices are trending upward because the higher prices create extra room between a home’s sale price and the balance on the home’s first mortgage. That tends to translate into lower interest rates, according to Jason van den Brand, co-founder and CEO of home equity marketplace Wellahead. In weak real estate markets, however, the reverse happens. “Declining or volatile home prices might lead to higher rates,” he says.
Home equity loan rates also vary by individual borrower and loan. Borrowers with higher credit scores tend to get lower rates (a 760 score or above will usually get you the best ones), as do those with lower loan-to-value ratios (LTV) — meaning their loan amount is a smaller portion of their overall home value. (Your LTV also impacts what you can borrow from your home. Most lenders will only let you borrow between 80% to 90% of your home’s value, minus any mortgage balance you currently have).
Finally, the way a home is used can also influence the interest rate you get. Properties that are second homes or investments are seen as riskier for lenders and often require higher interest rates. Primary residences, which borrowers are less likely to skip payments on (for fear of foreclosure), get lower ones.
How to get the best home equity loan rates
Home equity loan rates aren’t set in stone, so you can often get a lower rate just by comparing lenders. Online loan marketplaces such as LendingTree and van den Brand’s Wellahead can help, or you can get quotes directly from different institutions — your main bank, a credit union, an online bank and a dedicated mortgage company, for example.
Make sure you check for special promotions, too. As Seth Bellas, branch manager at Churchill Mortgage, explains, “I’ve seen a lot of banks and credit unions offer a discounted rate if you open a depository account with them and deposit a certain amount.”
You can also take steps to improve your credit score, as Bellas says, “Keeping your FICO score up is probably the biggest asset to keeping your rate low.”
Home equity loan rates vs. HELOC rates
With HELOCs, you get a line of credit — one you can draw from as needed, usually for a period of 10 years. You’ll then make interest-only payments until that 10-year period is up and full interest-and-principal payments after that.
Interest rates on HELOCs are usually variable. Most of the time, this means they have lower interest rates at the outset — think of this as a temporary teaser rate — but in six months (the exact length varies by lender), the rate starts to adjust. Because of this, your rate could end up higher than what a fixed-rate home equity loan would have offered. Your rate and payment will also change monthly for the remainder of the term.
Because of this “degree of uncertainty,” van den Brand says, borrowers need to tread carefully with HELOCs — particularly those who have unpredictable incomes.
Home equity loan rates vs. cash-out refinance rates
Another alternative to home equity loans is cash-out refinancing. With this strategy, you take out a new mortgage — one larger than your current mortgage balance — then use the new loan to pay off the old one, pocketing the difference in cash.
Typically, this can be a smart way to tap your home equity without having to take out an additional loan, but in today’s market, it isn’t so simple. According to Redfin, most homeowners — nearly 9 in 10 — enjoy a current mortgage rate of under 6%. If you’re in this group, a cash-out refinance would mean replacing your low-rate loan — possibly one with hundreds of thousands still on it — with a higher-rate one.
Because of this dynamic, a home equity loan or HELOC may be the better choice in today’s market.
As Scott Bridges, chief production officer at Pennymac, explains, “Both home equity loans and HELOCs allow homeowners to keep the low rate they currently enjoy on their first mortgage, which in this market is an advantage.”
More on home equity products
- What Is a Home Equity Line of Credit?
- How to Choose a Home Equity Loan
- What Is a Cash-Out Refinance, and How Do You Get the Best Rates?
Meet the contributor
Aly J. Yale
Aly J. Yale is a contributor to Buy Side from WSJ and a personal finance journalist with work featured in Forbes, Fox Business, The Motley Fool, Bankrate, The Balance, and more.
