Impact of Federal Reserve interest rate hikes on household net worth

The average consumer may not follow every signal from the Federal Reserve, 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, demonstrating how seriously policymakers are taking record inflation. For now, further rate hikes are expected at the Fed's remaining 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. "A lot will depend on data on inflation trends.

The goal of these rate hikes is to bring inflation to a comfortable 2 percent annual rate.

"Supply constraints have been more severe and persistent than expected, and price pressures are evident across a wide range of goods and services," said Jerome Powell, chairman of the Federal Reserve, in a statement released 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 so, expect further rate hikes on many types of financial products, including home mortgage rates.

How does the Federal Reserve affect mortgage rates?

When the Federal Reserve changes the rate on federal funds, it also changes the rate on a HELOC. This is because the interest rate on a HELOC is variable, just like the rate on a credit card. This means that the monthly payment changes when the rate increases or decreases.

Mortgages, on the other hand, generally have a fixed interest rate, which does not change once the loan is closed.

History of Fed rate increases

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, it 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 are a homeowner, you have been fortunate to be spared from the economic turmoil thanks to rising real estate prices.

• According to CoreLogic, homeowners enjoyed a collective net worth increase of $3.8 trillion in the past year, or a 32.2 percent increase, and the average homeowner gained $64,000 in net worth.
• At the same time, according to CoreLogic, the number of homes with non-covered mortgages-also known as negative equity-declined to 1.1 million properties, representing only 2 percent of all mortgages.
• TransUnion predicts that the median net worth of homes will 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 do homeowners have more equity today?

When you buy a home, the down payment determines how much equity you have up front, such as 3 percent or 20 percent. As the mortgage is paid off, you continue to accumulate equity.

However, due to the sharp increase in home values, many homeowners have been accumulating equity much faster than they would have if the 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 average homeowner with a mortgage loan has accumulated a net worth of $207,000, according to Black Knight.

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

"The fact that you have new wealth in the form of equity does not mean you should do anything with it," McBride says. "Remember that this is not like withdrawing money from an ATM. You are taking out a loan, and as interest rates rise, the cost of borrowing increases."

Frequently asked questions about Fed rate hikes and home loans

• What are the current rates for home loans?

  See interest rates for home loans

• What is the trend in interest rates for home loans?

  Currently, mortgage rates are expected to continue to rise until the end of 2022. If you are paying a mortgage, pay special attention to the trend of rates. "They have a variable interest rate, so those who have accumulated a high balance are exposed to rapid increases in interest rates," McBride says.

• What will happen to capital levels if rates correct?

  The housing market is in the early stages of a correction, which means slower price appreciation and more balanced conditions between buyers and sellers. This is partly due to rising mortgage rates. This market trend is not a sign of collapse, but a slowdown in price 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 could fall, but that is the exception rather than the rule."

• When will the Fed's next interest rate hike take place and what will happen?

  The next Federal Reserve meeting will end on September 21, and for now, the likelihood of another rate hike is high. The central bank will look closely at inflation data and other factors to determine the extent to which it is appropriate to raise rates. For a preview of the September meeting, see Bankrate here.

• How can I access my real estate capital?

  There are several ways to access real estate equity, including refinancing, which replaces your existing mortgage with a brand new loan for a larger amount, ideally at a lower rate, a Home Equity Loan (HELOC). The HELOC is a kind of second mortgage, while the revolving line of credit. All three options provide access to funds based on the borrower's equity.

• How is home equity calculated?

  You can estimate home equity simply by subtracting the amount still owed on the mortgage from the value of the home. The most reliable way to determine the value of your home is to get 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, a mortgage loan is paid all at once, while a HELOC gives you access to money when you need it. If you have to choose between the two, Bankrate's Home Equity Loan or HELOC calculator can help you decide.