Getty Images
There are countless reasons why you might need to borrow money. And when that need arises, you can look to personal loan or credit card to access financing. But with the The federal funds rate was frozen at a 23-year highcredit cards and personal loans are expensive options right now.
The good news is that those aren't your only options. In fact, if you own your home, you may have a significant amount of borrowing power that you can leverage at a competitive interest rate. This borrowing power comes from you home heritage (the current value of your home minus what you still owe your lender). In addition, you can leverage your capital through a Home Equity Line of Credit (HELOC).
If you're like most American homeowners, you probably have some equity on hand. That's because American homeowners have one average of about $299,000 in equity. Plus, they can keep a healthy 20% equity in their homes, even after tapping $193,000 of their equity on average.
But how much difference would using a HELOC make in terms of borrowing costs?
Find out how affordable a HELOC can be now.
Here's how much you'd save with a HELOC
Whether you decide to use a credit card, personal loan, or HELOC to meet your financial needs, the cost of that loan will be determined by a number of factors, including the amount you borrow, the rate you secure, and the nature of the loan. this rate (fixed or variable). From April 19, 2024, the average HELOC interest rate is 9.06%. At the same time, the average interest rates for personal loans and credit cards are 12.18% and 20.71%, respectively.
But what does this equate to in terms of dollars and cents? how much would it be a HELOC cost and how much would it save you compared to personal loans and credit cards if you were to borrow $15,000? The exact answer varies from credit cards and HELOCs have variable interest rates which can go up or down in front. But if current rates were to stay the same for the life of each product, here's how much each would cost over a 10-year payment period:
- HELOCs: A $15,000 HELOC at 9.06% would cost $190.50 per month. You would pay a total of $7,860.13 in interest over the life of the loan. But it's important to note that this amount assumes you take out the $15,000 and start paying it off right away. However, you are usually not required to make capital payments during your draw period (the first five to 10 years of a HELOC on average). If you take advantage of this interest-only period without making principal payments, your total interest cost will be higher.
- Credit cards: If you wanted to pay off a $15,000 credit card balance at 20.71% over 10 years, you'd have to pay $296.00 per month ($106.00 more per month than a HELOC). Over 10 years, you'll pay $20,637.00 in interest ($12,776.87 more than a HELOC).
- Personal loan: A $15,000 personal loan at 12.18% with a 10-year term would cost $216.77 per month ($26.27 per month more than a HELOC). Plus, you'll pay a total of $11,012.42 in interest over the life of the loan ($3,152.29 more in interest than a HELOC).
Note that interest rates are likely to change over the 10-year benefit period around these examples. HELOCs and credit cards have variable interest rates that will fluctuate with the global interest rate environment. You can also refinance your personal loan later if you find a better rate. However, HELOCs often provide significant monthly and long-term savings compared to credit cards and personal loans.
It's also worth noting HELOCs have other benefits. For example, you may be able to access a larger amount of funds with a HELOC than you could with a credit card or personal loan. And the interest you pay for HELOC can be tax deductible if you use the loan to make repairs or renovations on the home you used as collateral. Unfortunately, this is not true for credit card or personal loan interest.
Save money with a HELOC today.
The bottom line
A HELOC has the potential to save you thousands of dollars over the life of a $15,000 10-year loan compared to credit cards and personal loans. But, there is a trade-off. HELOCs are secured by your home. It is therefore vital that you are able to make your monthly payments, as failure to do so could put your home in jeopardy. However, if you know you can make the monthly payments and need access to financing, consider tapping into your home equity with a HELOC today.
Joshua Rodriguez
