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Homeowners currently have a valuable asset at their disposal: their home equity. As house prices have risen steadily in recent years, so have homeowners a lot of of equity to benefit from – averages about $327,000. The amount of accessible equity – the total that can be borrowed against while maintaining a 20% equity buffer – now stands at $214,000. That high amount of equity, combined with the recent rate cut by the Federal Reserve, has made this an opportune time to think about a home loan.
Mortgage loans are generally one of the most cost-effective lending optionsbecause these loans are backed by the equity in your home, meaning rates are typically lower compared to options like credit cards and personal loans. And the Fed’s recent 50 basis point cut in interest rates has provided a boost interest on mortgage loans even further, making them even more attractive. So if you’re planning to borrow money from the equity in your home, now could be a good time to make your move.
Before you take out a mortgage loanHowever, it is important to understand the monthly costs associated with these types of loans. How much would a $150,000 mortgage loan cost today now that interest rates have fallen? Below we explain what these payments could look like based on current rates.
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How much will a $150,000 mortgage loan cost per month now that interest rates are falling?
Unlike home equity lines of credit (HELOCs)what offer variable rates that could change depending on the broader interest rate environment. Most home loans have a fixed interest rate, so the interest rate you start your loan with is the interest you end with (unless you refinance your mortgage loan at some point). This way your payments remain consistent every month.
With a mortgage loan, the cost of your monthly payments is highly dependent the term of the loan and the interest rate you are offered. There are two common home terms to choose from: 10-year and 15-year loan terms, with the current 10-year loan terms offering an average interest rate of 8.50% and the 15-year loan terms offering an average interest rate of 8.41% offer. Here’s what the monthly payments would look like for each option based on current average rates:
- 10-year mortgage loan at 8.50%: At this rate and term, monthly payments would be $1,859.79 per month
- 15-year mortgage loan at 8.41%: At this rate and term, monthly payments would be $1,469.21 per month
As illustrated above, choosing the shorter 10-year mortgage loan would result in paying off the loan faster, but you would have to make higher monthly payments. On the other hand, if you opt for a term of 15 years, your monthly costs will be more manageable, but you will pay more interest in the longer term.
But those are just the monthly costs at current rates. There are expectations that the Fed could do that reduce rates even further in the coming months. Here’s what your monthly payments could look like if the Fed cuts rates by another 25 basis points and 50 collective basis points and home loan rates fall by the same amount:
If interest rates on home loans fall by 25 basis points:
- Mortgage loan with a term of 10 years at 8.25%: At this rate and term, monthly payments would be $1,839.79 per month
- 15-year mortgage loan at 8.16%: At this rate and term, monthly payments would be $1,447.37 per month
If interest rates on home loans fall by 50 basis points:
- Mortgage loan with a term of 10 years at 8.00%: At this rate and term, monthly payments would be $1,819.91 per month
- 15-year mortgage loan at 7.91%: At this rate and term, monthly payments would be $1,425.70 per month
Given the potential savings, it may be tempting to wait until interest rates drop before borrowing. However, it can be difficult to time the market because interest rates are influenced by many more factors than just the Fed – and there is always a risk that interest rates will rise in the future. So if you need to borrow money soon, it may be worthwhile to arrange a favorable rate now.
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The bottom line
If you plan to take out a $150,000 mortgage loan at today’s average rates, your monthly payments will range from $1,469.21 to $1,859.79, depending on the loan term you choose. And the Fed is expected to lower rates further over time, which could help drive down the cost of a home loan even further. But if you plan to wait, you might want to think twice about that strategy. While you may be able to save on interest costs by waiting for interest rates to drop further, this is a risky gamble. For many borrowers, it might make more sense to do this Set a good course now – and if interest rates drop in the future, there is always the option to refinance and capitalize the savings.
