If the Fed keeps interest rates unchanged at a 23-year high, Home equity Loans have become an attractive option for homeowners lately. When you borrow against the equity of your home, your home is used as collateral, which can result in cheaper interest rates compared to unsecured loan options. For many homeowners, taking out a home equity loan is one of the best and cheapest ways to get large sums of money – especially now that the average level of home equity is approaching the $300,000 mark.

Borrowing based on the equity of your property could soon become even cheaper. Inflation has cooled in the last four months, so the Federal Reserve is expected to lower its key interest rate as early as September. If that happens, it will likely lead to a drop in interest rates on various credit products, including Home Loans And Home Equity Lines of Credit (HELOCs)This would be good news for homeowners who want to borrow money at the lowest possible interest rate.

But before you Use the equity of your homeit’s important to understand the financial implications. For example, if you want to borrow $150,000 from your home’s equity with a HELOC, you’ll need to understand the monthly costs involved. Here’s what you’ll pay for a HELOC of that amount under current market conditions.

Find out about the currently lowest interest rates for home loans here.

How much would a $150,000 HELOC cost per month?

Currently, the average HELOC interest rate is 9.37%, which is significantly lower than the average credit card interest rate (which is approaching 23%) and the average personal loan rate (which is currently around 12%). So for homeowners with $150,000 in available equity, a HELOC is currently one of the most cost-effective loan solutions.

To illustrate, here is a breakdown of the costs for 10- and 15-year HELOC repayment periods:

• 10-year HELOC at 9.37%: USD 1,930.30 per month, totaling USD 81,636.35 in interest paid
• 15-year HELOC at 9.37%: $1,554.59 per month, totaling $129,826.54 in interest paid

While a $150,000 HELOC would cost between $1,554.59 and $1,930.30 per month at full drawdown, it is important to remember that HELOC rates are variable. They are usually adjusted monthly, so your costs may change over time.

The Federal Reserve is expected to begin cutting interest rates starting next month. The first rate cuts are expected to be 25 basis points. If HELOC rates drop 25 basis points to 9.12%, monthly payments would look like this:

• 10-year HELOC at 9.12%: $1,909.89 per month, totaling $79,187.02 in interest paid.
• 15-year HELOC at 9.12%: $1,532.13 per month, totaling $125,782.74 in interest paid.

Keep in mind that these calculations assume that you borrow the entire $150,000 immediately and make regular payments. In reality HELOCs offer more flexibility than that. You can borrow only what you need, when you need it, potentially reducing your overall interest costs.

If interest rates continue to fall, which is becoming increasingly likely, both your monthly payments and the total interest paid on this HELOC could continue to decline.

Learn more about the lowest HELOC rates you can qualify for here.

Are home loans the cheaper alternative?

At today’s average interest rate of 8.52%, a $150,000 15-year home equity loan would result in monthly payments of about $1,478.87. That’s a total interest payment of $116,196.31 over the life of the loan, making it slightly cheaper than a 15-year HELOC at today’s rates.

However, affordability is not the only factor to consider. It’s important to also weigh the pros and cons between home equity loans and HELOCs, including:

• Tariff structure: The main difference between HELOCs and home equity loans is that Home equity loans are linked to fixed interest ratesHELOC interest rates are variable and can decrease as market conditions change. This means HELOC borrowers may be able to take advantage of future rate reductions without having to refinance.
• Flexibility: HELOCs allow borrowers to withdraw funds as needed, potentially lowering overall interest costs. In contrast, home equity loans provide a lump sum upfront.
• Refinancing costs: If interest rates fall significantly, would have to refinance to take advantage of lower interest rates. This process incurs closing costs that can be significant and can offset the benefits of a lower interest rate.
• Long-term considerations: While the fixed interest rate of a home equity loan offers security, it can become less competitive if there is a sharp decline in market interest rates. HELOC borrowers would automatically benefit from such declines.

The conclusion

In today’s economy, both HELOCs and home equity loans can be an affordable way to borrow $150,000. Ultimately, however, the best choice between a HELOC and a home equity loan depends on your circumstances. If payment stability is most important to you and you’re happy with the current interest rate of 8.52%, you may prefer a home equity loan. If you benefit from future rate cuts and value flexibility, a HELOC may be a better fit despite the higher initial interest rate.