The Federal Reserve and your home equity
The average consumer may not follow all the signals from the Federal Reserve, but what the central bank does plays a role in what consumers pay for just about everything, including home equity lines of credit (HELOC ), home equity loans and other types of mortgages. .
Key takeaways from the latest Fed meeting
At the last Federal Reserve meeting in July, the central bank raised the federal funds rate by three-quarters of a percentage point – a move that underscores how seriously policymakers are taking record inflation. Going forward, expect to see additional rate hikes at the remaining Fed meetings this year, in September, November and December.
“The question is how aggressive they will have to be,” says Greg McBride, chief financial analyst for Bankrate. “That decision will largely depend on what the inflation trend data says.”
The objective of these rate increases: bring inflation back to a comfortable annual rate of 2%.
“Supply constraints have been deeper and longer lasting than expected, and pricing pressures are evident across a wide range of goods and services,” Federal Reserve Chairman Jerome Powell said in a statement. after the July meeting. “Although the prices of some commodities have fallen recently, the spike in crude oil and other commodity prices that resulted from Russia’s war on Ukraine has pushed up gasoline prices. and food, creating additional upward pressure on inflation.”
Powell indicated that “another unusually large increase may be appropriate” at the Fed’s next meeting. If that happens, prepare to see further rate increases on many types of financial products, including home equity loan rates.
How the Federal Reserve Affects Home Equity Rates
When the Federal Reserve adjusts the federal funds rate, the rate tied to a HELOC moves with it. This is because a HELOC has a variable interest rate, just like a credit card. This means that your monthly payment changes as the rate increases or decreases.
Home equity loans, on the other hand, usually have a fixed interest rate, so the rate won’t change once you take out the loan.
History of Fed rate hikes
One of the main responsibilities of the Federal Reserve is to set the federal funds rate, or the price of borrowing money. A higher rate tends to reduce demand and spending, while a lower rate has the opposite effect. While the central bank has taken aggressive steps to raise the federal funds rate this year, the rate is still relatively low. Here’s a look at the history of Fed rate hikes since the 1980s.
Home Equity Statistics 2022
The past two years have caused financial hardship for many, but if you’re a homeowner, you’ve been on the safe side of some of the economic turmoil associated with soaring home prices.
- Homeowners with mortgages enjoyed a collective $3.8 trillion increase in equity over the past year, an increase of 32.2%, according to CoreLogic, with the average homeowner earning $64,000 in equity.
- At the same time, the number of homes with underwater mortgages — also known as negative equity — fell to 1.1 million properties, representing just 2% of all mortgages, CoreLogic reports.
- Per owner, median home equity is expected to exceed $129,000 by the end of 2022, according to TransUnion forecasts.
- HELOC balances totaled $319 billion in the second quarter of 2022, according to the Federal Reserve Bank of New York.
Why Homeowners Have More Net Worth Today
When you bought your home, your down payment determined how much equity you had to start with, say 3% or 20%. As you pay off your mortgage, you continue to accumulate this capital.
However, as home values have increased dramatically, many homeowners have been accumulating equity much faster than they would have at the usual historical rate. In June, home prices were up 18.3% year over year, according to CoreLogic. While that growth is expected to slow a bit in the coming months, the ramp-up has given the average homeowner with a mortgage $207,000 of workable equity, Black Knight reports.
Still, if you’re looking at your escalating home value with thoughts of what else you can do with that equity, proceed with caution.
“Just because you have new wealth in the form of your home equity doesn’t mean you should do anything with it,” McBride says. “Remember, it’s not the same as going to the ATM to withdraw your money. You’re borrowing, and with rising interest rates, that borrowing becomes more and more expensive.