How much would a $20,000 home equity loan cost per month?
Home equity loans are a popular choice for homeowners looking to tap into the equity they've built in their homes to fund major expenses — especially right now. Not only do home equity loans currently offer lower average rates compared to many other types of borrowing options, but the average homeowner has a lot of equity to borrow against currently.
Thanks to home values increasing over the last few years, the amount of tappable home equity that the average homeowner has is currently about $200,000. While most lenders will only allow you to borrow a percentage of your total equity (usually up to 80%), the money you borrow can be used for all sorts of purposes, from making home repairs to completing renovations or even paying off high-interest debt.
But whatever the reason for tapping into your home's equity, it's important to understand how much you'll pay each month for your loan. That way, you can determine whether the loan payments will fit into your budget. Below, we'll break down the costs of three different scenarios for a $20,000 home equity loan, considering various loan terms and interest rates, to help you understand the potential costs.
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How much would a $20,000 home equity loan cost per month?
Before diving into specific examples, it's important to understand that the cost of a $20,000 home equity loan per month depends on several factors, including the loan term and the interest rate. Home equity loans typically come in two main forms: fixed-rate home equity loans and variable-rate home equity lines of credit (HELOCs).
Two of the more common options are 10- and 15-year loan terms. To illustrate the average monthly costs, we'll look at three different loan options: a 10-year fixed home equity loan, a 15-year fixed home equity loan and a 10-year home equity line of credit (HELOC).
We'll use the following formula to calculate the average monthly costs for each type of home equity loan:
Formula: Monthly payment = P * [r(1 + r)^n] / [(1 + r)^n – 1]
P = Principal amount ($25,000)
r = Monthly interest rate (Annual rate / 12 months / 100)
n = Number of monthly payments (Loan term in years * 12)
Learn more about the home equity rates you could qualify for here.
Example 1: 10-year fixed home equity loan at 8.88%
When you take out a home equity loan, the rate on your loan is fixed, meaning that it remains consistent over the life of your loan. The only way the rate on a home equity loan changes is if you refinance the loan to a new one at a different rate. This results in the same payment from month to month.
For this example, let's calculate the average monthly cost of a $20,000 10-year fixed home equity loan with a fixed rate of 8.88%, which was the average rate for 10-year home equity loans as of October 16, 2023. Using the formula outlined above, the monthly payment for this loan would be $252.05 (assuming that there are no extra fees to consider).
Example 2: 15-year fixed home equity loan at 8.89%
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.
As you can see, a 15-year fixed home equity loan at 8.89% interest offers a lower monthly payment compared to a 10-year loan with a similar rate. However, the monthly payment for this loan only drops by about $51 per month compared to the shorter loan because you're paying a slightly higher rate of interest for a longer period, so you're paying more interest in total.
Example 3: 10-year variable-rate HELOC at 9.00%
Unlike home equity loans, home equity lines of credit (HELOCs) do not result in lump-sum payments. Rather, a HELOC works like a line of credit that can be drawn from as needed — and this type of loan typically comes with a variable interest rate. This means the rate can increase or decrease depending on the economic environment.
For this example, though, let's do the math on a 10-year HELOC with a 9.00% initial interest rate, which was the average 10-year HELOC rate as of October 16, 2023. In general, calculating the monthly cost of a HELOC is slightly different as the interest rate can change over time, but for this example, we'll assume that the HELOC rate stays the same (9.00%) throughout the life of the loan and that the entire line of credit was used by the borrower.
What we get using the formula above is a monthly average payment of $253.35. That said, it's essential to be aware that the interest rate on a HELOC can fluctuate, which means that your monthly payment may change over the life of the loan.
The bottom line
Understanding how much a $20,000 home equity loan will cost per month is vital when making a decision about borrowing against your home's equity. In general, the monthly payment will vary based on the loan term and interest rate. And, while shorter loan terms result in higher monthly payments, longer terms can offer lower monthly costs — but you'll pay more in interest over the life of the loan. Before committing to any home equity loan, it's crucial to compare various options and consider your financial goals to make an informed decision that suits your unique needs and circumstances.
