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Why is it that a home equity loan or a home equity line of credit comes with a higher interest rate than a 15-year or 30-year fixed-rate mortgage?

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These are 3 different types of products, so why expect them to be priced the same?

One difference that comes to mind is that the regular mortgages are usually the first lien on the property, whereas the equity loan or HELOC are second/third in many cases. Also, the equity loans are not as easy to sell as the regular mortgages which find their way from big banks that originated them to various investor bundles. By selling these mortgages the banks get rid of the risk and get the profits much faster than by extending and servicing HELOCs.

I'm sure there are many other differences that affect the costs, but these are the major ones that I could think of.

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Not always the case. My current HELOC is 2.5%, and would be lower based on Prime - 1.25% except for a minimum rate clause. At the same time, my mortgage is 3.5%.

That said, it's the same supply and demand at play. People often want to borrow money, but not go through the full mortgage process, so they're willing to pay a percent or two higher than they would for a long term mortgage. Last, the amount is usually smaller than the mortgage would be, $50-100K is common.

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  • Its hard to compare really... There are different kinds of mortgages and they have different rates. There are different kinds of HELOCs, which also have different rates. What would you compare with what? And what if the mortgage is 3 years old, and the HELOC is new, etc etc etc
    – littleadv
    Feb 13, 2013 at 22:33
  • I'd compare available rates at the same point in time. The OP's observation is right, typically the HELOC is above the 30 year fixed, but not always.
    – JTP - Apologise to Monica ♦
    Feb 13, 2013 at 23:55

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