How much does a $125,000 HELOC cost per month now that rates have dropped?

With the recent drop in interest rates, the home equity lending landscape is shifting, and more borrowers are turning to home equity lines of credit (HELOCs) as a way to access cash for big projects or other financial needs. HELOCs, which are lines of credit with variable interest rates, were generally seen as a gamble over the last couple of years due to the Fed's aggressive stance on inflation. That's because as the Fed raised rates, homeowners with HELOCs saw their rates increase and their monthly payments climb.

Now, with inflation cooling and interest rates starting to decline, this could be the right time to take out a HELOC. While the variable nature of HELOC rates may have caused concern as the Fed was pushing up borrowing costs, it may now work to your advantage. After all, the Fed is expected to slash its benchmark rate twice more throughout the remainder of 2024 and into 2025. If the benchmark rate continues to trend downward, homeowners with HELOCs are likely to see their rates drop in tandem. That, in turn, would make their monthly payments more affordable.

So what can borrowers expect to pay each month on a $125,000 HELOC now that rates have dropped? And what can they expect to pay if rates continue to drop? Here's what your monthly payments could look like on a $125,000 HELOC at today's rates, and what they could look like if the Fed drops rates even further over time.

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How much does a $125,000 HELOC cost per month now that rates have dropped?

Right now, the average HELOC interest rate averages 8.69% (as of October 22, 2024). Based on this rate, let's break down what a $125,000 HELOC would cost with common repayment periods.

• 10-year HELOC at 8.69%: The monthly payment on a $125,000 HELOC at this rate would be $1,562.55.
• 15-year HELOC at 8.69%: The monthly payment on a $125,000 HELOC at this rate would be $1,244.89.

These payments reflect the current rate environment, but with future rate cuts anticipated from the Federal Reserve, those numbers could drop further in the coming months. If rates were to decrease by 0.25%, here's what the monthly payments would look like:

• 10-year HELOC at 8.44%: The monthly payment on a $125,000 HELOC at this rate would be $1,545.81 per month.
• 15-year HELOC at 8.44%: The monthly payment on a $125,000 HELOC at this rate would be $1,226.53 per month.

A half-point reduction would lower costs even more:

• 10-year HELOC at 8.19%: The monthly payment on a $125,000 HELOC at this rate would be $1,529.17 per month.
• 15-year HELOC at 8.19%: The monthly payment on a $125,000 HELOC at this rate would be $1,208.32 per month.

These figures show that a $125,000 HELOC is becoming more affordable, especially if additional rate cuts happen in November and December as many analysts expect. The savings could be significant over time as rates continue to fall.

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Does a HELOC make sense in today's rate environment?

Given the current economic outlook, opting for a HELOC could be a smart financial move for homeowners. While HELOC rates are hovering close to 9%, these lines of credit are still some of the most affordable borrowing options available right now. For example, rates on credit cards are averaging about 23%, so borrowers would save hefty amounts of interest just by opting for a HELOC over a credit card in today's borrowing environment. 

The Federal Reserve has also indicated that further rate reductions are possible soon. This presents a unique opportunity for homeowners to take advantage of falling rates. Unlike fixed-rate loans, most HELOCs come with variable rates, meaning that borrowers can benefit from reduced interest costs as rates decrease. So, if you take out a HELOC now, your payments could become cheaper over time, making this an appealing option for those seeking flexible financing.

It's important to keep in mind, though, that the variable nature of HELOC rates can be a double-edged sword. While falling rates are a benefit, it's important to be cautious, as rates could rise again in the future, which would drive up the cost of your monthly HELOC payments. So, it's essential to evaluate your financial situation and ensure you're comfortable with the potential for changing monthly payments.

The bottom line

For many homeowners, especially those with significant equity, a HELOC is worth considering in today's market. If you need to borrow $125,000, a HELOC is currently one of the most cost-effective borrowing options, with monthly payments ranging from approximately $1,245 to $1,563 when calculated at today's rates. As rates continue to drop, those payments could decrease even further, making HELOCs a flexible and affordable option. However, while the rate cuts are promising, it's important to be mindful of the variable nature of these loans and plan accordingly. Always make sure that you borrow an amount that fits your budget, and be prepared for possible changes in future payments.