Will home equity loan rates decline this summer? Experts weigh in
Overall, the interest rates on home equity loans are averaging about 8.60% right now. While this average rate is lower than it was earlier this year, today's high-rate borrowing environment is still giving some homeowners pause when it comes to the idea of tapping into their home equity.
That's due, in large part, to many homeowners hoping that in the near future, the issues with stubborn inflation will continue to cool — and the Fed will lower its benchmark rate to bring down consumer interest rates, including home equity loan interest rates. After all, taking on new debt at a time when inflation and interest rates are still high could have a negative impact on many household budgets.
But will home equity loan rates drop this summer, making it cheaper for homeowners to borrow against their home equity? Here's what the experts say.
Find out how affordable the right home equity loan could be now.
Will home equity loan rates decline this summer? Experts weigh in
Many people were hoping for an interest rate cut when the Fed met this week. However, the slight decrease that occurred with inflation month-over-month — which dropped from 3.4% in April to 3.3% in May — wasn't enough to prompt that type of action from the Fed. Rather, the Fed opted to keep rate hikes paused for now instead.
But a Fed rate cut is what needs to happen overall for there to be a substantial drop in home equity loan rates. While each lender sets its home equity loan rates, how those lenders determine rates is based on the federal funds rate, which comes from the Federal Reserve.
"Home equity rates are tied to the prime rate, which is based on the federal funds rate," says Sarah Alvarez, vice president of mortgage banking at William Raveis Mortgage. "So as the Fed cuts rates, people will see that the rates for their home equity lines will come down as well."
While many expected the Fed to start cutting interest rates this spring, inflation stayed high, and those anticipated rate cuts didn't happen.
"As of the moment they are staying the same," Alvarez says.
And, it could be a while before any future rate cuts happen, experts say.
"When the Federal Reserve raises or lowers this rate, it can affect the overall interest rate environment and may cause home equity loan rates to go up or down," says Michael Collins, CFA and founder and CEO of WinCap Financial. "It's difficult to predict with certainty whether home equity loan rates will go up or down this summer. However, the rates might start to fall if inflation decreases."
"While everyone is hopeful that the Fed will begin their rate-cutting cycle soon, it's more likely that this will happen in the fall," Alvarez says.
So, if you're thinking about tapping into your home equity but want to wait until rates drop, you may have to hold off a bit longer.
"General predictions and expectations are that the Fed will begin their rate cutting cycle this year and hopefully continue over the course of at least the next 24 months," Alvarez says. "It's important to remember that there is not going to be a straight line down."
And, it's important to note that while home equity loan rates are higher than they used to be, these loans might still be one of the most affordable borrowing options available right now. According to Kevin Ryan, president and chief financial officer at Better.com, the alternatives are a lot more costly in today's rate environment.
"As rates are expected to gradually decline over the summer and fall, home equity rates should continue to follow that trend into the end of the year," Ryan says. "While rates are high compared to the period during COVID, they are much lower than alternative products like credit cards and personal loans."
For example, the average credit card interest rate is almost 22% right now, which is more than twice the current home equity loan interest rates. And, personal loan interest rates average about 12.49% currently, according to the Federal Reserve. So, a home equity loan could be your best bet if you need to borrow money now.
Explore your top home equity loan options here.
Home equity loan alternatives to consider
There are lots of uses for a home equity loan, from funding for necessary home repairs or renovations or an affordable route to consolidating high-interest credit card debt. But a home equity loan isn't your only option for equity-tapping. For example, you can consider a home equity line of credit (HELOC) or a cash-out refi instead.
"A HELOC works similarly to a home equity loan but offers more flexibility, as borrowers can access funds as needed instead of receiving a lump sum upfront," Collins says. "Another is cash-out refinancing, which involves refinancing your current mortgage for a higher amount than you currently owe and taking out the difference in cash."
Each home equity tapping option comes with its own pros and cons to consider. For instance, you may need good credit and a lot of equity to qualify for cash-out refinancing, Collins says. But each circumstance differs, so your best bet may be to talk to a professional before making any moves.
"It's important for borrowers to carefully consider their options and evaluate their financial situation before taking on any new debt, especially if home equity loan rates are high," Collins says.
