Getty Images 
For most homeowners, their home has become more than just a place to live — it’s also a powerful financial asset. After years of rising home values, the average homeowner now has about $313,000 in home equity to tap into, and if you are a homeowner who’s built up substantial equity in your home, you may be considering borrowing against it with a home equity loan or a home equity line of credit (HELOC). But borrowing against your home isn’t a decision to take lightly.
Before you commit, it’s essential to weigh the pros and cons of each option carefully. For example, a home equity loan offers the predictability of fixed payments, while a HELOC provides flexibility but comes with the uncertainty of changing rates. That means your monthly payment could shift dramatically over time. Both can be good options, but the rate environment and other factors can play a big role in which one makes the most sense.
And if you’re planning to tap into a hefty amount of that equity — let’s say $200,000 — it’s extremely important to weigh these and all of the other factors to determine whether it’s the right move. After all, with your home on the line, making the wrong choice could have serious consequences.
Lock in a top home equity borrowing rate today.
$200,000 home equity loan vs. $200,000 HELOC: What to consider now
Tapping into $200,000 of your equity through a home equity loan or HELOC is a big financial commitment. Here’s what you should consider before doing so:
The interest rates and costs
One of the key differences between a home equity loan and a HELOC is that a home equity loan comes with a fixed rate while a HELOC has a variable rate. So, while a home equity loan interest rate is fixed, meaning that it will stay the same over time, a HELOC rate can change from month to month based on several factors, including Federal Reserve rate decisions.
Here’s what a $200,000 home equity loan and $200,000 HELOC cost monthly at today’s rates (assuming the HELOC rate is constant):
- 10-year home equity loan at 8.52%: $2,481.85
- 15-year home equity loan at 8.45%: $1,963.62
- 10-year HELOC at 8.04%: $2,430.78
- 15-year HELOC at 8.04%: $1,915.93
If HELOC rates were to go up by 0.5%, here’s what your monthly payments for a $200,000 HELOC would be (assuming the rate is constant):
- 10-year HELOC at 8.54%: $2,483.99
- 15-year HELOC at 8.54%: $1,974.17
And here’s what your $200,000 HELOC monthly payments would look like if rates fell 0.5% (assuming the rate is constant):
- 10-year HELOC at 7.54%: $2,378.21
- 15-year HELOC at 7.54%: $1,858.57
As illustrated above, the variable rate on a HELOC can make the monthly payments just as costly (or more so) as a home equity loan if rates rise at least 0.5%, but a 0.5% rate drop could lower your HELOC costs by around $50 per month. But whatever borrowing option you choose — a home equity loan or HELOC — rates are just one of many factors to consider.
Find out how affordable home equity borrowing could be here.
The risks of taking out a $200,000 home equity loan or HELOC
While tapping into $200,000 in home equity through a home equity line of credit or a home equity loan can be an affordable way to borrow in today’s high-rate environment, it also comes with risks. Because your home is used as collateral when you take out a home equity loan or HELOC, the biggest risk is typically losing your home if you can’t afford the payments each month.
“Remember your home is collateral, so you could lose your home if you get into trouble and cannot make your payments,” says Denise Supplee, founder of real estate investing group SparkRental.
That risk is increased when taking out a HELOC since its rate is variable, meaning that if rates increase, your monthly payment will, too. That, in turn, could mean that your monthly HELOC payments eventually become larger than you can afford, especially if rates tick up over time.
While a $200,000 home equity loan doesn’t present that same risk, the fixed monthly payments start after you receive your loan. So, if you’re borrowing $200,000 from your home’s equity, you’ll need to be able to afford a payment of more than $1,900 (at today’s rates) for 10- and 15-year terms — and if you can’t keep up with those payments, you’ll put your home at risk.
But while borrowing $200,000 worth of home equity comes with risks, there are ways to help mitigate the potential issues. For example, HELOC borrowers need to have a plan for the possible repayment scenarios that could occur since the monthly payments can change, says Kimberly Brazier, a loan officer with mortgage lender Loan Factory.
“[Borrowers] should know the risk,” says Brazier. “The homeowner should work to assess their financial situation and consult a financial professional to make sure that they have a planned repayment strategy.”
The bottom line
The average homeowner has lots of home equity in their home — enough, in some cases, to tap into $200,000 worth of home equity. Borrowing that amount of money requires extra caution, though, so it’s important to borrow responsibly since your home is at risk if you default on the loan. You should also make sure to shop around to find the best rate, as even a 0.5% change can make a considerable difference in how much interest you pay over the life of your home equity loan or HELOC.
