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With the recent decline in interest rates, the home lending landscape is shifting and more borrowers are entering the market home equity lines of credit (HELOCs) as a way to access cash for large projects or other financial needs. HELOCs, which are lines of credit with variable interest rateshave generally been seen as a gamble in recent years due to the Fed’s hawkish stance on persistent inflation. That’s because when the Fed raised rates, homeowners with HELOCs saw their interest rates rise and their monthly payments increase.
But now with inflation cooling and interest rates start to drop, now could be the right time to take out a HELOC. While the variable nature of HELOC rates may have raised concerns during rising interest rates, so may now work to your advantage. After all, the Fed is expected to cut rates twice more in the remainder of 2024 and in 2025, and if rates continue to fall, homeowners with HELOCs will likely see their rates drop together. That, in turn, would make their monthly payments more affordable.
Now what can borrowers expect to pay each month for a $125,000 HELOC? rates have fallenalthough? And what can they expect to pay if interest rates continue to fall? Here’s what your monthly payments could look like on a $125,000 HELOC at current rates and what they could look like if the Fed lowers rates even further over time.
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How much does a $125,000 HELOC cost per month now that rates have dropped?
At the moment the average HELOC rate average 8.69% (as of October 22, 2024). Based on this rate, let’s see what a $125,000 HELOC would cost with common repayment terms.
- 10-year HELOC at 8.69%: The monthly payment for a $125,000 HELOC would be $1,562.55 at this rate.
- 15-year HELOC at 8.69%: The monthly payment for a $125,000 HELOC would be $1,244.89 at this rate.
These payments reflect the current interest rate environment, but with future rate cuts expected by the Federal Reserve, these numbers could decline further in the coming months. If rates were to drop by 0.25%, monthly payments would look like this:
- 10-year HELOC at 8.44%: The monthly payment for a $125,000 HELOC would be $1,545.81 per month at this rate.
- 15-year HELOC at 8.44%: The monthly payment for a $125,000 HELOC would be $1,226.53 per month at this rate.
A half-point reduction would reduce costs even further:
- 10-year HELOC at 8.19%: The monthly payment for a $125,000 HELOC would be $1,529.17 per month at this rate.
- 15-year HELOC at 8.19%: The monthly payment for a $125,000 HELOC would be $1,208.32 per month at this rate.
These numbers show that a $125,000 HELOC will become more affordable, especially if additional rate cuts occur in November and December, as many analysts expect. The savings can be significant over time if interest rates continue to decline.
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Does a HELOC make sense in today’s rate environment?
Given the current economic outlook, opt for a HELOC could be a smart financial move for homeowners. Although HELOC rates currently hover around 9%, these lines of credit are still among the most important most affordable borrowing options available now. For example, rates on credit cards average about 23%, so borrowers could save significant interest amounts in today’s lending environment by simply opting for a HELOC instead of a credit card.
The Federal Reserve has also indicated that further interest rate cuts are possible soon. This presents a unique opportunity for homeowners to take advantage of falling interest rates. Unlike fixed interest loansMost HELOCs have variable interest rates, meaning borrowers can benefit from lower interest costs as interest rates decline. So if you get a HELOC now, your payments could get cheaper over time an attractive option for those looking for flexible financing.
However, it is important to keep in mind that the variable nature of HELOC rates can be a double-edged sword. While falling rates are a benefit, it’s important to be cautious as rates could rise again in the future, which would drive up the cost of your monthly HELOC payments. So it is essential to evaluate your financial situation and ensure that you are comfortable with the possibility of changing monthly payments.
The bottom line
For many homeowners, especially those with significant home equity, a HELOC is worth considering in today’s market. If you need to borrow $125,000, a HELOC is currently one of the most cost-effective borrowing solutions, with monthly payments ranging from approximately $1,245 to $1,563 calculated at current rates. As rates continue to drop, these payments could drop even further, making HELOCs a flexible and affordable option. However, while the rate cuts are promising, it is important to consider the variable nature of these loans and plan accordingly. Always make sure you borrow an amount that fits your budget and be prepared for possible changes in future payments.
