Solution-wise, we have one word for you: refinance. Refinancing your HELOC can make your monthly payments more affordable, either by reducing your interest rate or the payment size (or possibly both).
Assuming a borrower who has spent up to their HELOC credit limit, the monthly payment on a $50,000 HELOC at today's rates would be about $372 for an interest-only payment, or $448 for a principle-and-interest payment.
HELOC rates are tied to an index, meaning they can fluctuate over time depending on what's going on in the broader economy. For example, HELOC rates are typically tied to the prime rate, which is based on the federal funds rate set by the Federal Reserve. The Fed sets this rate based on its policy goals.
Because your HELOC is based on a variable rate, your monthly payments will vary. During the draw period (the first ten years), when you can borrow and repay multiple times, your minimum monthly payment will be interest accrued based on the outstanding principal balance.
It's important to understand that most HELOCs offer variable interest rates, but borrowers sometimes can negotiate with the lender for a fixed interest rate for the remainder of the repayment period.
To illustrate, here's what the costs would be on a $75,000 HELOC for both 10- and 15-year repayment periods: 10-year HELOC at 9.37%: $965.15 monthly, totaling $40,818.17 in interest paid. 15-year HELOC at 9.37%: $777.30 monthly, totaling $64,913.27 in interest paid.
The bottom line. If you're looking for a relatively inexpensive way to borrow money in today's economy and don't want to delay by waiting for a lower rate, a HELOC could be the smart alternative. Rates are variable and likely to become lower as the interest rate climates continues to cool.
The average HELOC interest rate is currently 9.16%. If you took out a HELOC, and your interest rate remained the same for the life of the credit line (with a 15-year repayment period), you would pay $307.14 per month.
HELOC payment examples
For example, payments on a $100,000 HELOC with a 6% annual percentage rate (APR) may cost around $500 a month during a 10-year draw period when only interest payments are required. That jumps to approximately $1,110 a month when the 10-year repayment period begins.
Typically, you can also make extra payments toward your HELOC balance. Be aware that your loan may have a prepayment penalty if you do this, though many lenders don't charge them. However, closing a HELOC early, before the end of the draw period, is more likely to cost you a fee.
Since the end of September, HELOCs have been trading below 9 percent and, along with home equity loans, they're forecast to retreat further in 2024. At its Dec. 17-18 meeting, the Federal Reserve slashed interest rates by a quarter point, its third consecutive rate cut since September 2024.
If you don't repay the line of credit as agreed, your lender can foreclose on your home. Lenders must disclose the costs and terms of a HELOC. In most cases, they must do so when they give you an application.
Reduce your debt-to-income ratio
With a lower debt-to-income ratio, lenders will see that more of your money can go towards paying off your HELOC, which usually equates to lower HELOC rates. Typically, lenders will require that you have a debt-to-income ratio that doesn't exceed 43 percent for a HELOC.
Key Takeaways
Home equity lines of credit (HELOCs) generally have variable interest rates, which can eventually lead to higher monthly payments. HELOC borrowers who initially make interest-only payments face dramatically higher monthly payments once the interest-only period expires.
You can deduct interest on a home equity line of credit (HELOC), but only if you use the funds for home improvements. The introduction of the Tax Cuts and Jobs Act (TCJA) eliminated deductions on interest if you use the funds for anything else, such as to consolidate debt.
HELOCs in particular can be a trap. “Many homeowners find it difficult to stay disciplined in paying down the principal on their line of credit,” Bellas says. During the initial draw period, “most HELOCs only require you to pay down the interest every month, similar to how a credit card has a minimum payment.
A $20,000 home equity loan can cost qualified borrowers between $195.89 and $247.97 per month, depending on the repayment term chosen.
A home equity line of credit or HELOC is another type of second mortgage loan. Like a home equity loan, it's secured by the property, but there are some differences in how the two work. A HELOC is a line of credit that you can draw against as needed for a set period of time, typically up to 10 years.
By refinancing your HELOC with a cash out refinance, you can get a single loan to pay off both your mortgage and your HELOC. You may be able to lock in a fixed interest rate and reduce the amount of your total monthly payments.
In some cases, the fee the lender charges may be based on how early you prepay the HELOC. For instance, if you close a HELOC before three years has elapsed, you may pay a 3 percent penalty or you could be charged a 5 percent penalty for closing a HELOC before the five-year mark.
The average home equity loan interest rate (as of January 8, 2025) is 8.43% and slightly higher for different repayment periods (8.55% for a 10-year one and 8.49% for a 15-year repayment period). So if you can get a rate under any of those three, you can consider it a "good" one right now.