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Borrowers looking for ways to access large sums of money often have limited options to choose from. Home Equity is one of the best ways to achieve this, especially now that the average homeowner owns around $300,000 in equity to use. And in today’s single-rate climate, where rates on popular alternatives like personal loans and credit cards are in the double digits, home equity borrowing offers homeowners a cost-effective financial solution. They can do so either as a lump sum (a home equity loan) or a line of credit (Home equity line of credit, or HELOC).
Before borrowing in this way, however, it is essential to understand that the house in question will serve as collateral. You should therefore only borrow the amount that you can afford to repay without difficulty. To determine your budget, however, you must first calculate the potential costs.
An $80,000 home equity line of credit, for example, won’t necessarily overburden your budget. And with hundreds of thousands of dollars of equity remaining, on average, you won’t burn through the entire value of your home, either. But what exactly will an $80,000 home equity line of credit cost you each month? And why is it arguably the highest? best alternative to home equity loans right now? This is what we will calculate below.
Find out right here now how much equity you have in your home.
How much does an $80,000 per month home equity line of credit cost?
Right away, Home equity loans have slightly higher interest rates than HELOCs. But this may not be a problem for many owners, since the former has a fixed rate while the latter has a floating ratewhich could soon drop if rate cuts are issued. That said, it’s difficult to pinpoint exactly how much an $80,000 per month HELOC will cost, as rates on the repayment period will adjust, sometimes significantly.
However, using the current average HELOC rate of 9.17%, here’s what borrowers can expect to pay each month, based on two different repayment periods:
- 10-year HELOC at 9.17%: $1,020.78 per month for a total of $42,493.73 in interest paid
- HELOC over 15 years at 9.17%: $819.52 per month for a total of $867,514.23 in interest paid
For comparison, here’s what you’d pay for an $80,000 home loan over the life of the loan (not including application fees). refinancing):
- 10-year mortgage at 8.73%: $1,001.75 for a total of $40,210.41 in interest paid
- 15-year mortgage at 8.71%: $797.67 for a total of $63,580.65 in interest paid
Learn more about your current home equity options online today.
Questions to ask
Home equity borrowing comes with inherent risks, as outlined above. However, it can be a smart and effective way to achieve your financial goals if you take a strategic approach. That means having the answers to questions as:
- Is the lowest fixed interest rate on home equity loans better than the highest HELOC rate if HELOC rates are expected to fall while home equity loans remain fixed?
- How much will you pay to refinance your home loan at a lower rate in the future? And how will those rates be calculated? costs compare to what you could have saved by using a HELOC instead?
- How much are HELOC rates expected to drop and when?
- Is it worth waiting for the rate environment to improve or should you go for the lowest possible rate now?
- What are the funds used for? If you use them for eligible home repairs and renovations, interest on a loan home equity loan And HELOC Interest may be tax deductible, making the issue of interest rates moot. But if you use it for other purposes, you won’t be able to claim the tax deduction.
Only you know the answers to these personal financial questions. But it’s important to answer them clearly and accurately to get the most out of either home equity loan option.
The essential
Home equity loans and HELOCs both have competitive rates right now, with the latter being slightly higher but with the inherent ability to adjust over time. And in today’s economy, where rates are expected to drop soon, this may be the preferred option for many homeowners. Just be sure to carefully consider the Advantages and disadvantages of both to make the most informed decision possible, now and for the upcoming repayment period.
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