Do home equity loans or mortgages have lower rates?

By Ronald K. Mann On Jul 8, 2022

After a long period of very low interest rates, mortgage and home equity loan rates are rising. If you need cash for a major home improvement project or other expenses, you may be concerned about rates for home equity loans and refinance mortgages. But which option has lower rates?

Home equity loans are generally more expensive than mortgages, but they can incur higher fees. Your cost will depend on the lender, your creditworthiness and the length of loan you want.

Key points to remember

Home equity loans are generally more expensive than mortgages.
As of April 28, 2022, the average annual percentage rate (APR) for a 30-year fixed rate mortgage was 5.47%.
The average rate for a home equity loan is 5.76%.
Loans with no closing costs are available, but lenders charge higher interest rates on these loans.

What is a mortgage loan?

Mortgages are specific types of loans used to purchase property. With a classic mortgage, you borrow a sum of money to buy a house. The amount you borrow is based on the value of the home minus your down payment.

However, a cash-out refinance mortgage is a tool you can use to get a big chunk of money. You take out a new mortgage for more than you owe on the existing one, and you get the difference to use for your expenses or projects.

What is a home equity loan?

A home equity loan is for current homeowners who have built up equity in their property, meaning it is worth more than they owe on their current mortgage. In general, lenders require you to have at least 20% equity in the loan to qualify for a loan.

How are home equity loans different from mortgages?

Home equity loans and cash refinance loans use your home as collateral. But there are a few major differences to keep in mind:

Terms: A cash refinance loan is a type of mortgage loan. Like conventional mortgages, they usually have terms of 15 or 30 years.
Closing costs: Although home equity loans tend to be more expensive than mortgages, they generally have lower closing costs.
APR: Home equity loans usually have fixed interest rates. Cash refinance loans, like other mortgages, can be either fixed or adjustable rate mortgages.

Typical home equity loan and mortgage rates

When it comes to rates, home equity loans and refinance mortgages can differ significantly. Home equity loan rates tend to be higher than cash refinance mortgage rates.

As of April 28, 2022, the average rate for a 30-year fixed rate mortgage was 5.47%, while the average rate for a home loan was 5.76%.

If you can afford the payments over a shorter loan term, consider a 15-year mortgage. They have significantly lower rates than 30-year mortgages. As of April 28, 2022, the average 15-year mortgage rate was 4.77%.

Home Equity Loans or Mortgages: Which is Right for You?

Now that you know the typical interest rates for mortgages and home equity loans, you can think about which loan option is right for you. If you’re still not sure, ask yourself the following three questions:

Do I have money for closing costs?

Although home equity loans have higher rates than mortgages, they generally have lower fees. This is because you have to pay closing costs as a percentage of the total loan amount.

For a home equity loan, you can choose exactly how much money you want to borrow and pay closing costs on just that amount. But with a refinance loan with a drawdown, you have to pay closing costs on the entire loan: the amount that covers your current mortgage and the extra money you add to it.

If you don’t have enough money to save, you might be better off taking out a home equity loan or finding a lender that lets you build closing costs into the loan.

How much money do I need?

Think about how much money you need. If you’re planning home renovations or a vacation, set a budget and add some wiggle room to give yourself a cushion.

The amount and available equity in your home will help you determine which loan option is best for you. Cash refinance loans can usually earn you more money than home equity loans.

Does my current loan have a low rate?

Depending on when you took out your current mortgage, you could have a rate significantly lower than the rates available today. If so, using a cash refinance loan may not make sense; you would move your loan to a higher rate and pay that rate on a larger loan balance.

Instead, using a home equity loan — and leaving your existing mortgage in its current state — can lower your overall repayment cost.

Are mortgage rates rising now?

Although mortgage rates are higher now than they were a few months ago, they are nowhere near their all-time high. In the 1980s, mortgage rates reached 18%.

What if my cash needs are unpredictable?

How can I increase the equity in my home?

Home equity increases based on two factors: mortgage repayments and increases in property value. Paying off your mortgage faster, making larger or additional payments, or both, can help you build equity. If you want to increase the value of your property, consider renovating or making improvements to your home.

The essential

Mortgages may have lower interest rates than home equity loans, but that doesn’t mean they’re always a better choice. When deciding which type of loan is best for you, consider your goals, your credit, and current loan terms. Keep in mind that mortgage and home equity loan rates are constantly changing, so it’s important to shop around with multiple lenders to find the latest rates.