Most lenders require borrowers to make monthly HELOC payments just as they would with any other loan.
Calculating the monthly cost for a $50,000 loan at an interest rate of 8.75%, which is the average rate for a 10-year fixed home equity loan as of September 25, 2023, the monthly payment would be $626.63. And because the rate is fixed, this monthly payment would stay the same throughout the life of the loan.
Once the draw period is over, the HELOC will transition to the repayment period. At this point, you can't borrow against the line of credit anymore, and you'll start paying back what you borrowed. You'll make monthly payments that include both principal and interest, over a set term, often as long as 20 years.
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.
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.
HELOCs can be a good option if you have substantial equity in your home and you know you'll need access to cash with some regularity over a period of time — college tuition bills over the course of several years, for example.
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.
HELOC funds are borrowed during a “draw period,” typically 10 years. Once the 10-year draw period ends, any outstanding balance will be converted into a principal-plus-interest loan for a 20-year repayment period.
Having a HELOC doesn't prevent you from selling. However, your HELOC balance is repaid from the sale proceeds along with your mortgage, which means less money in your pocket at closing. Additionally, certain scenarios, such as depreciated home values or short sales, can make selling with a HELOC extra challenging.
While having an unused HELOC can be advantageous in many ways, it's essential to be aware of the potential costs. Some HELOCs come with annual fees or maintenance fees, which you might still have to pay even if you don't use the credit line. The fees you could incur, even with an unused HELOC, include: Inactivity fees.
A second mortgage is a home-secured loan taken out while the original, or first, mortgage is still being repaid. Like the first mortgage, the second mortgage uses your property as collateral. A home equity loan and a home equity line of credit (HELOC) are two common types of secondary mortgages.
"I am of the belief rates for HELOCs will fall in 2024, as well as interest rates in general," says Mark Charnet, founder and CEO of American Prosperity Group. "This means the varying rate of a HELOC will benefit mortgagers as the rates fall." The Federal Reserve adjusts interest rates in response to economic activity.
Is 3.5% a good HELOC rate? In today's market, 3.5% would be an uncommonly good HELOC rate. Since 3.5% would currently fall below the Federal Funds Rate, lenders couldn't offer this rate on any home loan without losing money.
If your HELOC has a variable interest rate, and that rate increases while you're still paying back what you borrowed, your monthly payment could be higher than what you can afford. If this happens, you should contact your lender.
Annual membership/account maintenance fees are charged by lenders to keep your home equity line of credit open. These can vary from as little as a $5 membership fee to as much as a $250 annual account maintenance fee. Transaction fees may be charged for withdrawals from your HELOC, although these vary by lender.
Like a home equity loan, a HELOC can be used for anything you want. However, it's best-suited for long-term, ongoing expenses like home renovations, medical bills or even college tuition.
A HELOC is secured by your home as collateral for the loan. For that reason, lenders typically consider HELOCs less risky than some other types of financing, like unsecured personal loans or high-interest credit cards. As a result, lenders can often offer lower interest rates and initial closing costs.
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.
It's relatively easy to get a HELOC. That's especially true if you meet the requirements mentioned above. However, if you don't qualify for a HELOC today, there are a few things you can do to improve your chances of approval in the future.
The average national interest rate for a 15-year home equity loan is just slightly higher than for the 10-year option at 9.09%. Taking out a $200,000 loan with these terms would result in monthly payments of $2,039.25.
Despite their advantages, home equity loans come with many risks — like losing your home if you miss payments. You could also wind up underwater on the loan, lower your credit, or see rates on the loan rise. Reading your loan documents carefully can help you prepare for and avoid many of these risks.
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.