Thinking of Taking out a Home Equity Line of Credit? Think Again

There have been numerous ads on TV, the radio and the Internet urging homeowners to borrow money against their home to pay off high-interest credit card balances, pay for any repairs or remodeling or even take that vacation you’ve always wanted. It’s being pitched as an alternative to refinancing, but, based on the rates, it may not be the better alternative.

According to Bankrate, as of July 19, 2023, the home equity line of credit (HELOC) is at 8.58%. The 10-year home equity loan rate was 8.59% and the 15-year home equity loan rate was 8.55%. Bankrate calculates the rates by obtaining rate information from the 10 largest banks and thrifts in the country and then uses a scenario based on a loan or line amount of $30,000 with a FICO score of 700 and a combined loan-to-value ratio of 80%.

One of the reasons for the elevated HELOC rates is the recent rate hike by the Federal Reserve, which occurred this month. Greg McBride, Bankrate’s chief financial analyst, said, “As long as the Fed is active, HELOC rates are going to continue to march higher.”

Another reason, according to Business Insider, is that they change with the prime rate, which banks use to charge low-risk financial institutions or high-net-worth individuals who are considered creditworthy. The prime rate is what commercial banks use to set interest rates on credit cards, mortgages and consumer loans. 

Is it better to refinance? It might be. On the same day, the 30-year fixed-rate mortgage was at 6.87%, according to the Mortgage Bankers Association. For Mortgage News Daily, it was 6.90%  and for Freddie Mac, which didn’t release its rates until July 20, the rate was at 6.78%. 

Freddie Mac noted there was a decrease in mortgage rates the week before, which they attributed to the rate of inflation starting to cool down. But, even if the rates were to push back up to over 7%, it would still be a better deal than a HELOC.