Impact of the Federal Reserve's rate hike on household net worth

The average consumer may not follow all of the Federal Reserve's signals, but the central bank's actions affect the price consumers pay for almost everything, including home equity lines of credit (HELOCs), home equity loans and other types of mortgages.

Key points from the Fed's last meeting

At its last meeting in July, the Federal Reserve raised the federal funds rate by three-quarters of a percentage point, showing how seriously policymakers are taking record inflation. For now, further rate hikes can be expected 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 at Bankrate. "That decision will depend largely on what the data say about inflation trends."

The goal of these rate hikes: to bring inflation back to a comfortable 2 percent annual pace.

"Supply constraints have been greater and more persistent than expected, and price 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 prices of some commodities have fallen recently, the earlier spike in crude oil and other commodity prices due to Russia's war with Ukraine has pushed up gasoline and food prices, creating additional upward pressure on inflation."

Powell indicated that "another unusually large increase may be appropriate" at the next Fed meeting. If that happens, be prepared to see further rate increases on many types of financial products, including home mortgage rates.

How the Federal Reserve affects home mortgage rates.

When the Federal Reserve changes 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 the monthly payment changes when the rate goes up or down.

Mortgage loans, on the other hand, usually have a fixed interest rate, which does not change once the loan is closed.

History of Fed rate hikes

One of the Federal Reserve's main responsibilities is to set the federal funds rate, or the price of borrowed money. A higher rate tends to dampen demand and spending, while a lower rate has the opposite effect. Although the central bank has moved aggressively to raise the federal funds rate this year, the rate remains relatively low. Here is an overview of the history of Fed rate hikes since the 1980s.

Housing stock statistics for 2022

Over the past two years, many people have faced financial hardship, but if you own a home, you were lucky to be spared from the economic turmoil by rising home prices.

• According to CoreLogic, in the past year, homeowners enjoyed a collective $3.8 trillion increase in equity, or a 32.2 percent increase, and the average homeowner gained $64,000 in equity.
• At the same time, according to CoreLogic, the number of homes with uncovered mortgages-also known as negative equity-declined to 1.1 million properties, representing only 2 percent of all mortgages.
• According to a TransUnion forecast, median home equity is expected to exceed $129,000 by the end of 2022.
• According to the Federal Reserve Bank of New York, HELOC balances will reach $319 billion in the second quarter of 2022.

Why homeowners have more equity today

When buying a home, the down payment determines the amount of initial equity, such as 3 percent or 20 percent. As the mortgage is paid off, you continue to accumulate equity.

However, with the steep rise in home values, many homeowners have been accumulating equity much faster than they would have if homes had been revalued at the usual historical rate. According to CoreLogic, home prices rose 18.3 percent year-on-year in June. Although this growth is expected to slow in the coming months, the increase has resulted in the average homeowner with a mortgage having $207,000 in equity, according to Black Knight.

However, if you are looking at the increase in the value of your home and thinking about what you can do with the equity, be careful.

"Just because you have new wealth in the form of equity does not mean you should do anything with it," McBride says. "Remember, it's not like going to the ATM and withdrawing your money. You take out a loan, and as interest rates rise, the loan has an increasing cost."

Frequently asked questions about Fed rate hikes and home mortgages

• What are current home loan rates?

  See the interest rates for home

• Where are home mortgage rates headed?

  Right now, mortgage rates can be expected to continue to rise for the rest of 2022. If you are making payments on a HELOC, pay particular attention to changes in rates. "They have a variable interest rate, so those who have accumulated a large balance are exposed to rapid increases in interest rates," McBride explains.

• What will happen to equity levels in the event of a rate correction?

  The housing market is in the early stages of a correction, which means a slowdown in price appreciation and more balanced terms between buyers and sellers. This is due in part to rising mortgage rates. This market trend is not a sign of collapse, but slowing appreciation will mean slower equity growth for homeowners. "Home prices are unlikely to fall," McBride says. "They are simply stabilizing. There may be isolated zip codes where prices may decline, but that is the exception rather than the rule."

• When will the next Fed rate hike occur and what will happen?

  The next Federal Reserve meeting concludes on Sept. 21, and at the moment, the likelihood of another rate hike is high. The central bank will closely examine inflation data and other factors to determine to what extent to raise rates. For an overview of the September meeting, see Bankrate here.

• How can I access my home equity?

  There are several ways to access home equity, including cash-out refinancing, which replaces the existing mortgage with a brand new loan for a larger amount, ideally at a lower rate, a home equity loan or HELOC. The home equity loan is a type of second mortgage, while the HELOC is a revolving line of credit. All three options provide access to funds based on one's equity share.

• How is home equity calculated?

  You can estimate the equity in your home simply by subtracting the amount still owed on your mortgage from the value of your home. The most reliable way to determine the value of your home is to obtain a professional appraisal. If you are obtaining a mortgage or home loan, your lending institution will require this step.

• What is the difference between a home equity loan and a HELOC?

  There are two main differences between home equity loans and HELOCs. First, a home equity loan has a fixed interest rate, so your payment will never change, while a HELOC has a variable interest rate that can increase or decrease your payment from month to month. Second, an equity loan is distributed in a lump sum, while a HELOC gives you access to the money when you need it. If you have to choose between the two, Bankrate's Home Equity Loan or HELOC calculator can help you make a decision.

Written by

Jessica Parker

Loans, Mortgage, Insurance

Jessica Parker is a senior content creator with years of copywriting experience. She joined Empire Finance Pro in 2018. She holds a Master’s degree in journalism from Northwestern University, and her work has appeared in a number of top-tier finance publications including Forbes, FinancialTimes and Bloomberg.

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