Here's what a $300,000 home equity loan would cost monthly
Did you know that the average American homeowner has $299,000 worth of equity in their homes? Around $190,000 of that equity is accessible. And tapping into that equity could be relatively inexpensive. Since home equity lending options are backed by your home, the interest rates on these loans are often lower than other popular borrowing options - like personal loans and credit cards.
One popular way to access the equity in your home is with a home equity loan. These loans are generally funded in one lump sum and usually come with a fixed interest rate and payment. So, they offer a way to get your hands on a meaningful amount of money as well as payments that stay the same through the life of the loan, making the loan payments easy to budget for.
But what if you wanted to tap into $300,000 worth of your home equity? How much money would you have to pay monthly? That's what we will calculate below.
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Here's what a $300,000 home equity loan would cost monthly
The monthly cost of a $300,000 home equity loan depends on two important factors:
- How long the loan term is: Shorter terms typically come with higher monthly payments than longer terms because the time you have to repay what you borrowed is compressed. Then again, shorter terms also typically lead to a significant overall interest savings when compared to longer terms.
- Your interest rate: Your interest rate also plays a meaningful role in your monthly payment. Moreover, those interest rates typically vary by loan term. At the moment, 10-year home equity loans have an average interest rate of 8.73% while 15-year home equity loans have an 8.70% average interest rate.
So, what does that mean in terms of monthly payments? Find a few examples below.
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Example #1: 10-year fixed-rate home equity loan at 8.73%
If you borrow $300,000 against your home equity with a 10-year fixed-rate home equity loan at 8.73%, your payments would be $3,756.58 per month. Over the course of the 10-year loan, you would pay $150,789.02 in interest. Adding interest to the $300,000 principal loan amount means you would pay a total of $450,789.02 over the life of the loan.
The good news is that the fixed rates associated with home equity loans mean that the payments won't change. That is, unless you refinance the loan at some point. But that may be a good thing. With inflation on the rise again, there's no telling where interest rates may go. Should inflation continue heading up, rate hikes will become more likely. But since these loans offer fixed rates, if the average home equity loan interest rate did increase, the change would have no impact on your monthly payments.
Example #2: 15-year fixed-rate home equity loan at 8.70%
A $300,000 15-year fixed-rate home equity loan at 8.70% would come with a $2,989.49 monthly payment. While that payment is lower than the 10-year fixed-rate option, you would end up paying far more interest over the life of the loan. The 15-year option would result in total interest payments of $238,108.97, as compared to $150,789.02 in interest payments with a 10-year home equity loan. Moreover, your total payoff cost (inclusive of interest and principal) on a $300,000 15-year fixed-rate home equity loan at 8.70% would be $538,108.97.
What about a HELOC?
A home equity line of credit (HELOC) is a variable interest home equity borrowing option. These loans usually start with a draw period which is followed by a repayment period. You'll make interest-only payments during the draw period and payments toward interest and principal during the repayment period.
Today's average HELOC interest rate is 9.04%. But there's no telling what that rate might be when your repayment period starts. After all, HELOC interest rates change regularly. And the leading driver of changes to interest rates - inflation - has, thus far, proven unpredictable. So it's not possible to predict with certainty what a $300,000 HELOC would cost over time.
Moreover, a variable rate loan may not be the best choice in today's inflationary environment. While experts thought rates would start to fall in 2024, robust inflation and jobs data suggest that may no longer be the case. And if inflation continues to rise, rate hikes could come in the future (though it's too early to tell if that might be a probable outcome). On the other hand, if rates fall before your repayment period begins (or during it), you could save money with a HELOC.
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The bottom line
A $300,000 home equity loan would likely come with payments ranging from $2,989.49 to $3,756.58 per month, but may be higher or lower. You could also choose a HELOC to access the money you need, but determining what the monthly cost of a HELOC might be is difficult due to the variable interest on the loan. Not to mention, with inflation ticking up, HELOC rates could rise in the future. So, a fixed-rate home equity loan may be your better option.
