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MoneyWatch: Managing Your Money
By Joshua Rodriguez
Edited By Matt Richardson
/ CBS News
Your home equity could be a valuable source of funding when you need it. Not only do most American homeowners have a meaningful amount of equity available to them, tapping into it is typically a lower cost option than accessing funding through other lending products.
But, there's a caveat to consider. Your home acts as the collateral that secures home equity lending products. So, it's important to make sure you can afford the monthly payments on a home equity loan before you take one out. After all, if you don't pay the loan back as agreed, you could risk your home.
Based on that, it's important to only borrow what you need. "The minimum amount that one can borrow on a home equity loan will vary depending on the program and the lender," explains Earl Dell, senior vice president of national sales and acquisitions at the mortgage lending company, Mutual of Omaha Mortgage. "While conventional loans have no minimum amount, most tend to be a minimum of $10,000, either on a second mortgage HELOC or fixed rate second."
Are you considering accessing that minimal amount of home equity? Below, we'll break down the monthly payments on a $10,000 home equity loan.
See what home equity loan rate you could qualify for now.
How much would a $10,000 home equity loan cost per month?
When you take out a home equity loan, there are a few factors that determine how much your monthly payments will be. This includes the amount you borrow, the term of your loan, the interest rate you and how that interest is applied - fixed rate payments will stay the same over the life of the loan while variable rates will change. So, how much would you have to pay monthly if you decided to borrow $10,000 worth of your home equity at today's average interest rates?
- 10-year fixed home equity loan: 10-year fixed rate home equity loans currently have an average interest rate of 8.79%. At that rate, the monthly payment on a 10-year $10,000 home equity loan would be $125.54. You would pay $5,065.05 in interest over the 10-year loan term, bringing your total payoff cost to $15,065.05.
- 15-year fixed home equity loan: The average interest rates on 10-year and 15-year home equity loans are currently the same at 8.79%. At that rate, a 15-year $10,000 home equity loan would cost $100.18 per month. Though the monthly cost would be lower than the 10-year fixed option, the overall payoff cost would be significantly higher. With a 15-year loan, you would pay $8,032.62 in interest through the term of the loan for a total payoff cost of $18,032.62.
You may also opt for a home equity line of credit (HELOC). These home equity products come with variable rates. That means your interest rate and payment may change over time. However, that could be good news if rates fall ahead. Nonetheless, the average HELOC interest rate is 9.17%. If that rate were to stay the same over the life of a 15-year payoff period, you would pay $102.44 per month and a total of $8,439.28 in interest. That would bring your total payoff cost to $18,439.28 if rates don't change throughout the payoff period.
Compare your home equity borrowing options today.
How to choose your home equity loan term
Your home equity loan term plays an important role in the monthly and the overall cost of your loan. So, how do you choose between a 10-year and 15-year home equity loan?
One of the best ways to do so is to think about whether immediate savings or long-term savings are more important. If you need a lower monthly payment, a 15-year home equity loan may be your better option - even though this option may cost more over time. On the other hand, if you can make a higher monthly payment in exchange for significant long-term savings, a 10-year home equity loan may be the better choice.
The bottom line
A $10,000 home equity loan at today's average interest rates would cost between $100.18 and $125.54 per month, depending on the term of the loan. But, it's important that you consider your options carefully. While a longer, 15-year term would result in lower monthly payments, it would come with a higher overall interest expense. So, consider the short-term and long-term pros and cons of each option before you decide which is best.
