Home Equity Loan Disadvantages Higher Interest Rate Than a HELOC: Home equity loans tend to have a higher interest rate than home equity lines of credit, so you may pay more interest over the life of the loan. Your Home Will Be Used As Collateral: Failure to make on-time monthly payments will hurt your credit score.
Never use your home equity line of credit to pay for basic expenses like clothing, groceries, utilities or insurance. And, as much as we all need that vacation, you are better off saving for it than paying for it with the equity in your home.
You could risk losing your home in a foreclosure if you default on your loan. You'll have two mortgage payments: your original mortgage and the home equity loan. You'll pay closing costs.
Loan payment example: on a $50,000 loan for 120 months at 8.40% interest rate, monthly payments would be $617.26. Payment example does not include amounts for taxes and insurance premiums.
Example 1: 10-year fixed-rate home equity loan at 8.75%
If you took out a 10-year, $100,000 home equity loan at a rate of 8.75%, you could expect to pay just over $1,253 per month for the next decade.
Example 2: 15-year fixed home equity loan at 9.07%
As of December 21, 2023, the average national rate for a 15-year loan was nearly the same as for a 10-year loan: 9.08%. With that rate and term, you'd pay $764.27 per month for the loan.
Now let's calculate the monthly payments on a 15-year fixed-rate home equity loan for $20,000 at 8.89%, which was the average rate for 15-year home equity loans as of October 16, 2023. Using the formula above, the monthly principal and interest payments for this loan option would be $201.55.
Borrowers often wonder if they can pay off their home equity line of credit (HELOC) early. The short answer? A resounding yes, because doing so has many benefits. If you're making regular payments on your HELOC, you may be able to pay off your debt sooner, so you're paying less interest over the life of the loan.
Home equity loans can be an enticing option if you're a homeowner who needs to borrow money. They tend to have lower interest rates than those of personal loans and credit cards, and their fixed monthly payments can help you manage your budget.
A home equity loan generally comes with a lower interest rate than other types of loans since your home serves as collateral for the loan. If you have outstanding debt on a credit card, a personal loan, student loans or other debts, consolidating with a home equity loan could make it cheaper to pay them off.
If the value of your home drops significantly, your lender may decrease your HELOC limit to reflect the reduced equity or freeze your HELOC account altogether. A housing market crash may also cause you to default on your HELOC if you owe more on your home than it's worth.
A home equity line of credit (HELOC) is a great way to tap into your home's cash value without refinancing or selling. But before you can cash out equity, lenders need to know how much your home is actually worth. And that requires a new appraisal.
In October of 2023, Bankrate data showed rates were averaging 8.75 percent on home equity loans and 9 percent for HELOCs. There is one bright spot, though: If you use a HELOC or home equity loan for housing-related repairs or remodels, the interest can be tax-deductible. That can reduce the real cost of your financing.
Relatively lower interest rates: Home equity loans typically offer lower interest rates compared to unsecured loans like personal loans or credit cards. This is because home equity loans are secured by your property, reducing the risk for lenders.
A home equity loan has one big advantage over a personal loan: lower interest rates. But because the loan uses your home as collateral, the lender may have a claim over your home if you default. Unlike with a personal loan, the application process for a home equity loan is a bit more involved.
HELOCs are generally the cheapest type of loan because you pay interest only on what you actually borrow. There are also no closing costs. You just have to be sure that you can repay the entire balance by the time that the repayment period expires.
Though taking out a home equity loan can cause your credit score to drop, the impact is usually fairly small, and you can improve your score over time by managing your credit responsibly.
Home equity loan term lengths
A home equity loan term can range anywhere from 5-30 years. HELOCs generally allow up to 10 years to withdraw funds, and up to 20 years to repay. A cash out refinance term can be up to 30 years.
You'll make fixed monthly payments until the loan is paid off. Most terms range from five to 20 years, but you can take as long as 30 years to pay back a home equity loan.
Using a home equity loan to pay off debt: How it works
A home equity loan is a second mortgage, meaning that most homeowners will take out a home equity loan while they are still paying off their primary mortgage. You can borrow a lump sum of money with a home equity loan and use the cash to pay down your debts.
A $20,000 loan at 5% for 60 months (5 years) will cost you a total of $22,645.48, whereas the same loan at 3% will cost you $21,562.43.
For this example, we'll calculate the monthly cost for a $25,000 loan using an interest rate of 8.75%, which is the current average rate for a 10-year fixed home equity loan. Using the formula above, the monthly payment for this loan would be $313.32 (assuming there are no extra fees to calculate in).
The current average rate for a 15-year fixed-rate home equity loan is just slightly higher than the 10-year average rate at 9.09%. If you took out a loan for $150,000 with these terms, you're monthly payment would come to $1,529.44.