Home equity interest rates saw little change this week as reports showed signs that high inflation, which has dominated economic headlines this year, may be beginning to ease.

Average interest rates on home equity loans and lines of credit (HELOCs) are up a bit, but not nearly as much as last week’s HELOCs. The move came as lenders considered an increase in the Federal Reserve’s short-term benchmark interest rate as part of an ongoing campaign to curb high inflation.

There was some positive news on the inflation front this week, like that consumer price index showed inflation at 8.5% yoy in July, down from 9.1% in June.

Inflation plays a role in what happens to home equity loans and HELOC rates. HELOCs, with a variable interest rate tied to an index, often move somewhat in step with Federal Reserve changes, and the more persistent inflation is, the more likely the Fed is to raise its interest rate further. Home equity loans have interest rates that are more closely aligned with the lender’s cost of borrowing, which is influenced by the Fed and inflation, among other things.

Here are the average prices as of August 11, 2022:

How are home equity loans and HELOCs different?

When the value of your home is more than your mortgage and other home loan debt, that difference is called equity. With a home equity loan, or HELOC, you use that cash as collateral to borrow cash. Home equity loans and HELOCs work differently:

home loan are installment loans where you borrow a lump sum of money up front and pay it back in fixed payments over a set number of years at a set interest rate.

HELOCs are more like credit cards in that the bank gives you a limit on how much you can borrow at once — a line of credit — where only interest is paid on the money borrowed. The interest rate is often floating, meaning it changes over time with the market, typically based on a benchmark like the policy rate.

Interest rates on home equity loans and HELOCs are expected to continue rising through the end of 2022. Many HELOCs base their variable interest rate on that policy rate, which tends to track the Federal Reserve’s increase in short-term interest rates. The Fed has raised this key rate four times so far, most recently at the end of July. Home equity interest rates are also likely to continue to rise as banks’ borrowing costs rise.

Homeowners have never had more equity

Thanks in large part to a dramatic rise in home prices in recent years, American homeowners have never had more equity to borrow. ATTOM, a real estate data company, reported that in the second quarter of 2022 almost half of the mortgaged residential properties were considered “equity-rich”, That means mortgages and other home loans covered no more than half of their value.

A similar report by Black Knight, a mortgage technology and data company, showed this Total amount of vulnerable equity owned by American homeowners — which they could borrow for while still retaining 20% ​​– hit a new record high of $11.5 trillion in the second quarter, but that growth has slowed as price growth cooled.

Consumers looking to tap into that equity are increasingly turning to home equity products this year as dramatically increased mortgage rates have made refinancing with payouts less attractive. Cash-out refis were popular when mortgage rates were at record lows, but mortgage rates are up more than two percentage points since the start of the year, making consumers far less likely to want a worse rate on their mortgage, just to get something checkout.

Home equity loans and HELOCs can be risky

Like a mortgage, home equity loans and HELOCs are secured against your home. If you don’t pay it back, the bank can take your home. It’s also important to understand that just because the value of your home has increased, it doesn’t mean it will stay there forever. Real estate values ​​can fall. In your local market, prices could even fall while national averages are rising.

This added risk means you shouldn’t use a home equity loan or HELOC for anything. They are most commonly used for major home renovations, which can come with a high price tag but often increase the value of your home when complete. Experts warn against using them to finance a more expensive lifestyle or to consolidate debt.