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If you’re a homeowner, there’s a high probability that you have quite a bit of borrowing power available to you. And, that borrowing power could be coupled with competitive interest rates. The average homeowners has potentially hundreds of thousands of dollars to tap into right now.
But, what if you needed to get your hands on $40,000, and decided to use a home equity loan to do it? Of course, home equity isn’t free money; you’ll need to pay it back at some point. If you fail to make your payments as agreed you could lose your home. So, it’s important to make sure you can afford to pay back what you borrow. As such, you should calculate the expense before applying for a loan.
But, how much would your monthly payments be on a $40,000 home equity loan? That’s what we will break down below.
Find out how affordable a home equity loan could be now.
How much would a $40,000 home equity loan cost per month?
You monthly home equity loan payment will be based on your starting loan balance, your interest rate and the term of the loan you choose. Here’s how much you would need to pay monthly if you took out a $40,000 home equity loan with a 10-year or 15-year term, at today’s average interest rates.
A 10-year home equity loan: The average interest rate on a 10-year home equity loan is currently 8.80%. At that interest rate, a 10-year $40,000 home equity loan would cost $502.38 per month. You would pay a total of $20,286.04 in interest over the life of the loan for a total payoff cost of $60,286.04.A 15-year home equity loan: The average interest rate on a 15-year home equity loan is also 8.80% at the moment. So, your monthly payments on a $40,000 15-year home equity loan would be $400.96. The loan would come with a total interest cost of $32,173.06 and a total payoff cost of $72,173.06.
Based on these figures, the 15-year home equity loan would cost around $100 less per month than the 10-year option. But, there’s a tradeoff to consider. The total cost of the 10-year home equity loan is $11,887.02 less than the total cost of the 15-year option. So, you’ll have to decide if monthly savings or long-term savings are more important to you as you make your choice.
Compare your home equity borrowing options among leading lenders today.
What if you took the HELOC route?
You may decide to use a home equity line of credit (HELOC) to access the funding you need. But, these line of credit products come with variable interest rates that will change from time to time.
That said, the average HELOC interest rate is currently 9.88%. Assuming that your HELOC had the average interest rate, and that rate stayed the same over the course of a 10-year payoff period, your monthly payments on a $40,000 HELOC would be $525.95. During that 10-year repayment period, you would pay $23,113.82 in interest for a total payoff cost of $63,113.82.
Again, it’s important to note that your HELOC interest rate may change from time to time – and that could have an impact on your monthly payment. Moreover, these loans typically come with a draw period that gives you access to more funding for the first five to 10 years. If you take advantage of this funding access (by borrowing more money against your equity), you may enter your repayment period with a higher HELOC balance, resulting in higher payments.
Smart ways to use $40,000 in home equity
If you decide to tap into your home equity, it’s important to make wise decisions about how you’ll use it. Some of the smartest uses of home equity include:
Home repairs: If your home needs repairs, your home equity could give you the funding you need to take care of them. And, there’s an added benefit to doing so. If you use your home equity to repair or otherwise improve the home you use as collateral, your interest may be tax deductible.Pay off debt: Home equity loan and HELOC interest rates are typically lower than interest rates on products like credit cards and personal loans. So, you could save money by using your equity to pay off these high interest debts.Start a business: If you have a business idea, but don’t have the money to get started, your home equity could help. It could give you access to the funding you need to bring your business concept to fruition.
Use your home equity to your advantage now.
The bottom line
A $40,000 home equity loan with today’s average interest rate would come with a monthly payment ranging from $400.96 to $502.38. If you chose the HELOC route, your payment could be around $525.95, but that payment may change thanks to the variable rate these lines of credit typically come with. Nonetheless, if you do access your equity, be sure to use it wisely. Consider using your home equity it to make home repairs, pay off debt or start a business now.
Joshua Rodriguez is a personal finance and investing writer with a passion for his craft. When he’s not working, he enjoys time with his wife, two kids and two dogs.
