Since overall loan interest rates are still high, many homeowners are turning your home equity as a way to obtain the necessary funds at an affordable price. After all, the average homeowner currently has $200,000 in accessible home equity alone and about $300,000 in total capital, meaning they have plenty of funds to borrow from. Additionally, your home will be used as collateral when you tap into your equity, which usually results in securing a cheaper interest rate – especially compared to unsecured loans.

But the environment for home loans could soon become even more attractive. Inflation has cooled significantly in the last four months, and the Federal Reserve is now expected to its first interest rate cut of the year when it comes together in September. This could have an impact on the tariffs offered Home Loans And Home Equity Lines of Credit (HELOCs)making these loan options even more affordable.

Before you decide, Use the equity of your homeHowever, it’s important to understand the financial implications. For example, if you borrow $75,000 with a HELOC, you need to be aware of the monthly costs involved.

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How much would a $75,000 HELOC cost per month?

The average HELOC interest rate is 9.37% (as of August 21, 2024). While this rate is higher than it was a few years ago, it is still significantly lower than the average credit card interest rate (which is approaching 23%) and the average personal loan rate (currently above 12%). So for homeowners with $75,000 in available equity, a HELOC represents one of the most cost-effective loan solutions on the market today.

To illustrate, here are the costs of a $75,000 HELOC for 10- and 15-year terms. Repayment periods:

• 10-year HELOC at 9.37%: USD 965.15 per month, totaling USD 40,818.17 in interest paid
• 15-year HELOC at 9.37%: USD 777.30 per month, totaling USD 64,913.27 in interest paid

While a $75,000 HELOC would cost between $777.30 and $965.15 per month at full drawdown, it is important to remember that HELOC rates are variable. The Tariffs are usually adjusted monthlytherefore, the actual cost of your credit limit may fluctuate over time.

The Federal Reserve is also expected to cut its benchmark interest rate starting in September, with the first cuts expected to be 25 basis points. If HELOC rates were also to drop by 25 basis points to 9.12%, monthly payments would adjust as follows:

• 10-year HELOC at 9.12%: USD 954.95 per month, totaling USD 39,593.51 in interest paid
• 15-year HELOC at 9.12%: USD 766.06 per month, totaling USD 62,891.37 in interest paid

Note, however, that the calculations above assume that you borrow the entire $75,000 immediately and make regular payments on the borrowed amount. In reality, a HELOC is a line of credit, not a lump sum loan, so you what you need, when you need itThis in turn can reduce your overall interest costs.

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Would a home loan be cheaper?

Home equity loans currently have an average interest rate of 8.52%, so a $75,000 home equity loan with a 15-year term would have monthly payments of about $739.43. That’s a total interest payment of $58,098.15 over the life of the loan.

Home equity rates are fixed, so they would not automatically fall if rates were cut. However, if home equity rates were to fall by 25 basis points to 8.27% in September and you Wait until you set a courseyou could save money. At 8.27%, you would have a monthly payment of $728.48 and would pay a total of $56,126.07 in interest over the life of the loan.

But while a home equity loan might be more affordable at today’s average interest rates, that’s not the only factor to consider. You should also weigh the compromises between the two options before making a decision.

For example, HELOCs allow borrowers to withdraw money as needed, potentially lowering the overall interest cost. Home equity loans, on the other hand, provide a lump sum up front, meaning you pay interest on the entire loan amount. Should interest rates drop significantly after you take out a home equity loan, you would also must refinance to use them. This process Closing costs applywhich can negate the benefits of a lower interest rate.

The conclusion

In the current economic climate, both HELOCs and home equity loans can be an affordable way to borrow $75,000. However, whether a HELOC or home equity loan is the right move for you depends on what you prioritize. If your goal is to ensure payment stability and you’re happy with the current interest rate of 8.52%, a home equity loan could be the right option. However, if you want to automatically benefit from future rate cuts and need more flexibility, a HELOC may be a better fit, even with the higher initial interest rate.