How much would a $250,000 home equity loan cost per month?
The average American homeowner has some $299,000 worth of home equity. That's a significant amount of value that homeowners can use to pay off debt, cover the cost of home repairs or renovations, purchase a second home or take care of a wide range of other expenses.
However, when you take out a home equity loan, that loan will be secured by your home. So, your ability to make your payments is critical. But how large, or small, might those payments be?
That answer depends on the interest rate you agree to and the size of the loan you take. But say you wanted to tap into $250,000 of your home equity. How much would your loan cost per month? That's what we will calculate below.
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How much would a $250,000 home equity loan cost per month?
The monthly cost of a $250,000 home equity loan will depend on your interest rate when you take out the loan. The average rates on home equity lending options differ based on which one you choose. Some of the most common include 10-year fixed-rate home equity loans, 15-year fixed-rate home equity loans, and home equity lines of credit (HELOCs), which come with variable interest (meaning your interest rate and payments are subject to change).
Below, we'll calculate the the monthly cost of using these options to borrow $250,000 (note that the interest rates mentioned are today's average rates):
Example 1: 10-year fixed-rate home equity loan at 8.73%
If you borrow $250,000 worth of equity using a 10-year fixed-rate home equity loan at 8.73%, your monthly payments will be $3,130.48. In addition to the $250,000 loan amount, you would pay $125,657.52 in interest over the 10-year term for a total payoff amount of $375,657.52.
One of the benefits of this loan type is that it typically comes with a fixed interest rate and payment. That means if you take out a home equity loan for $250,000, your payment will stay the same through the life of the loan (unless you refinance it).
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Example 2: 15-year fixed-rate home equity loan at 8.70%
Your monthly payment would be $2,491.25 if you borrowed $250,000 in home equity with a 15-year fixed-rate home equity loan at 8.70%. Although that offers a meaningful savings over the $3,130.48 monthly payment you would make with a 10-year loan, it would also increase your total interest paid. Interest on the 15-year fixed-rate home equity loan would come to a total of $198,424.14 for a total payoff amount of $448,424.14.
So, if you're not sure which option is best, consider how each may impact your short-term and long-term financial stability. If you need a lower monthly payment now, a 15-year option may be better for you. If you want to spend less in interest overall, you'll likely be better served by a 10-year fixed-rate home equity loan.
Consider a HELOC at 9.04%
Another option to consider is a HELOC. These loans typically start with a draw period that gives you the ability to draw against your home equity for a predetermined amount of time. During this time, you'll typically make interest-only payments. Following the draw period is the repayment period. During this time, you'll be required to make payments toward your interest and principal loan amount.
However, HELOCs come with variable interest rates. And while the average HELOC interest rate is currently 9.04%, that rate is subject to change many times between today and the end of your draw period. So, it's impossible to tell exactly how much your monthly payments will cost you.
Nonetheless, that doesn't mean you shouldn't consider a HELOC. Today's interest rates are relatively high. So, there is the potential that your rate could adjust down before your repayment period begins. Then again, you should only choose this option if you can afford to risk a higher monthly payment as nobody can tell what rates might look like years from now.
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The bottom line
If you choose a fixed-rate home equity loan to borrow $250,000 worth of equity, your minimum payments will likely range from $2,491.25 to $3,130.48. Though, you may end up making lower payments with a HELOC if the interest rate environment cools over time.
Before choosing how you'll access your home equity, you should consider the pros and cons of your options and how those options fit into your overall financial plan. If you're not sure which to choose, consider reaching out to a home equity expert now.
