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Borrowers looking for a cost-effective way to access a large sum of money haven’t had many attractive options in recent years. Thanks to a combination of high inflation and an elevated federal funds rate designed to combat it, rates on borrowing products soared. Now, personal loans hover around 12% on average while credit cards rates are over 20%. Homeowners, however, can still secure financing in the single digits by accessing their home equity.
With a home equity loan or home equity line of credit (HELOC), owners can tap into hundreds of thousands of dollars worth of equity (on average) and they can do so at cost-effective rates. And while a home equity loan has unique features, there’s a compelling case to be made for opening a HELOC now, thanks to its variable interest rate, which many expect to decline in the weeks and months to come. But how much would a HELOC cost owners who use it to borrow $25,000 now? That’s what we will calculate below.
Are you considering a HELOC? See what interest rate you’d be eligible for here now.
How much would a $25,000 HELOC cost per month?
When calculating the potential costs of a HELOC, it’s critical to understand that the rate you open the line of credit with is subject to change over the repayment period (often monthly). So, the figures you calculate at the start are unlikely to remain constant.
Still, before borrowing any amount of money, it’s critical to crunch the potential costs so that you know what you can and can’t afford. Using today’s average 9.32% HELOC interest rate, then, here’s how much you could expect to pay over two different repayment periods (assuming the rate doesn’t change):
- 10-year HELOC at 9.32%: $321.04 monthly for a total of $13,524.22 in interest paid
- 15-year HELOC at 9.32%: $258.35 monthly for a total of $21,502.58 in interest paid
If you have excellent credit and pursue this borrowing option, you can expect to pay anywhere between $258.35 and $321.04 per month. But that payment could drop, perhaps significantly, as the Fed moves to cut its federal funds rate. And while that won’t directly affect what borrowers offer for home equity products, rates on both home equity loans and HELOCs are expected to drop as a result, too.
Get started with a low-rate HELOC online today.
What about cash-out refinancing?
If you’re not interested in a home equity loan or HELOC, a cash-out refinance is something you may be considering. With this option, you take out a new mortgage loan for a larger amount than what you currently owe. You then use the new loan to pay off the old one and take the difference between the two as cash for yourself.
The issue with this sort of financing option? It’ll involve giving up your current mortgage rate for today’s average one, instead. And if you have a mortgage rate below 6.53% right now (the average on a 30-year loan), you’d be giving up a low rate for a higher one to get that extra cash. So be sure to calculate the potential benefits before acting to make sure it’s truly better than a home equity loan or HELOC.
The bottom line
If you’re in need of $25,000 now and own a home with equity, a HELOC could be your best choice to obtain that financing. Not only will monthly payments be manageable (less than $325 monthly for qualified borrowers), but the chance that those payments will decline is significant now that inflation is cooling and interest rate cuts are on the horizon. Plus, if you use a HELOC for IRS-eligible purposes, you may be able to deduct the interest you paid on the line of credit when you file your taxes for 2024.
Have more HELOC questions? Learn more about your options here now.