In the current economic landscape, home equity line of credit (HELOC) interest rates have experienced a slight increase, yet lenders do not anticipate any interest rate cuts from the Federal Reserve in the near future. Despite this, the demand for second mortgage products remains high, particularly among homeowners who wish to tap into the equity tied up in their properties without refinancing their primary mortgage.
Since the Federal Reserve's first short-term interest rate cut in September last year, the prime rate—used by banks for their most preferred customers—has dropped from 8% to 7.50%. HELOC lenders use this prime rate as a guideline for all their lending rates. However, with no rate cut triggered by the Fed this year, lending rates have remained stable.
According to Zillow, rates on 10-year HELOCs increased by a modest five basis points to 75% today. Similarly, VA-backed HELOCs were slightly higher, up one basis point to 35%. This increase in rates is a reflection of the current market conditions and the overall economic climate.
Homeowners have a significant amount of value tied up in their houses, with more than $34 trillion in home equity at the end of 2024, according to the Federal Reserve. This is the third-largest amount of home equity on record. With mortgage rates remaining in the high 6% range, homeowners are unlikely to let go of their primary mortgage anytime soon, making selling the house an unattractive option for many.
Accessing some of this value through a HELOC can be an excellent alternative for homeowners who need additional funds without refinancing their primary mortgage. HELOCs offer flexibility and convenience, allowing homeowners to use the funds as needed without incurring the costs and complications associated with refinancing.
How do lenders determine HELOC interest rates? Unlike primary mortgage rates, second mortgage rates are based on an index rate plus a margin. The index is often the prime rate, which today stands at 7.50%. If a lender adds 1% as a margin, the HELOC would have a rate of 8.50%. However, reported HELOC rates are much lower due to lenders' flexibility with pricing on second mortgage products. Your rate will depend on your credit score, the amount of debt you carry, and the amount of your credit line compared to the value of your home.
In conclusion, while HELOC interest rates have risen slightly, they remain a viable option for homeowners looking to tap into their home equity without refinancing their primary mortgage. Understanding how lenders determine these rates and the factors that influence them can help homeowners make informed decisions when considering a HELOC.
