What Happens to Your Home Equity When Interest Rates Stay High for Another Three Years

Over the past two years, a certain kind of silence has descended upon American kitchens. The kind you hear when a homeowner opens their HELOC statement, narrows their eyes, and chooses not to bring it up during dinner. It’s not a dramatic number. Simply put, it’s consistently and silently higher than it was. And that silence will become much more intense if rates remain the same through 2029.

For the second straight meeting without making any changes, the Federal Reserve maintained its target range at 3.5 to 3.75 percent in March. Powell discussed the Middle East, dual mandates, and uncertainty in his typical cool manner. Every homeowner with a variable-rate line of credit already knows that the prime rate isn’t going anywhere quickly, even though he didn’t mention it. Therefore, the cost of borrowing against your home is also not.

On paper, home equity appears to be in better shape than it has been in many years. The majority of American metropolitan areas continue to have high property values. Individuals who made purchases prior to 2022 are sitting on significant unrealized gains. However, equity is an odd asset. It only matters if you can use it, and if you do, you will have to borrow money at rates that would have made a buyer in 2020 cringe. Wealth that is visible but uncomfortable to touch has an almost cruel quality.

You’ll see the same thing if you stroll through any suburban area that flourished during the pandemic: fewer contractor vans parked at the curb and fewer renovation dumpsters in driveways. Instead of tearing out their kitchens in 2021, people are repainting their cabinets. This might just be a matter of caution. Additionally, a granite countertop might seem like a luxury you’re financing indefinitely with a HELOC at nine or ten percent.

The fixed-rate cousins, home equity loans, are a different matter. You’re locked in if you lock in today. It’s a mixed blessing. Borrowers who jumped early might end up envying those who waited if rates drop significantly in 2027 or 2028, and the Fed’s own dot plot indicates at least one more cut this year. Investors appear to think that rates will eventually decline. For some time now, the market has held that belief.

Watching this develop, I’m not concerned about the headline rate. It is the result of compounding. Three more years of high borrowing costs will result in three more years of homeowners putting off minor leverage decisions that were once commonplace, delaying repairs, and delaying tuition payments. Equity isn’t truly equity if it doesn’t move. On a Zillow page, it’s a number.

And there’s the inheritance question, which no one wants to talk about. When older homeowners use reverse mortgages in the United States or equity release products in the United Kingdom, their loan balances increase due to the accumulation of unpaid interest. The math quickly becomes harsh at 5.47 percent compounding over ten years. The borrower is shielded from taking on more debt than the property is worth by the No Negative Equity Guarantee. The children who are waiting to inherit it are not protected.

Prolonged high rates eventually break something, if history is any indication, which it usually is. The demand for housing might be the cause. Perhaps it’s consumer credit. Perhaps it’s just the patience of borrowers who keep checking their banking app in the hopes that the prime rate will suddenly decline. Seldom does it. The walls are valuable. Turning the keys to that value just became more costly.