What three numbers show what home equity really costs you?

Summary

Line up three dollar amounts, all measured to the year you expect to sell or pay off: the cash that actually reaches you, everything you pay while you hold the loan or contract, and what is still owed on the day you leave. Add the second and third, subtract the first, and you have the cost in dollars for a fixed loan, a HELOC or a home equity investment alike. Rates and monthly payments feed into those amounts, but ranked on their own they can put two products in the wrong order.

The exit year comes first

A 10-year loan that you pay off when you sell in year five is a five-year borrowing decision, and nothing after year five matters to you. The same goes for a line of credit: the CFPB's HELOC booklet says that if you sell your home, "you are generally required to pay off your HELOC in full immediately." A home equity contract settles on the same trigger. Repayment is due at the end of the term "or upon a triggering event, such as when the homeowner sells the home," in the CFPB's words.

So pick the year first. Every other figure is measured up to it.

Two published offers, held for five years

Regions Bank advertises a fixed-rate home equity loan "as low as 6.75% APR" with no closing costs, and prints a repayment example: $50,000 over 10 years at 6.75% is 120 payments of $574.12. FourLeaf Federal Credit Union advertises a HELOC with a standard rate "as low as 7.00% Variable APR," interest-only payments for the 10-year draw period, and closing costs paid by the credit union unless the line is closed within 36 months.

Take $50,000 from each, sell in year five, and hold both rates where the pages put them:

	Regions home equity loan	FourLeaf HELOC
Cash received	$50,000	$50,000
Monthly payment	$574.12	$291.67
Paid over 60 months	$34,447.20	$17,500.00
Owed at the sale	$29,167.66	$50,000.00
Cost in dollars	$13,614.86	$17,500.00

The HELOC has half the payment and costs about $3,900 more. Its payments covered interest only, so the full $50,000 was still there at closing, and the loan's larger payments had been paying it down all along.

Sell in year two and the gap nearly closes

Stop the same arithmetic at 24 months. The Regions loan has taken $13,778.88 in payments and still owes $42,497.10, a cost of $6,275.98. The FourLeaf line has taken $7,000 in interest and still owes $50,000.

Then FourLeaf's closing-cost clause applies, because the line closed inside 36 months. The credit union says those third-party fees "generally range between $500.00 and $15,000.00," depending on the line amount, the property and its location. For a short hold, that repayment can outweigh the whole difference in rates.

Both rates here are floors. Regions quotes a range of 6.75% to 13.75%. FourLeaf's 7.00% assumes a combined loan-to-value ratio of 65% or less and an initial draw of at least $25,000, and it includes two 0.25% discounts; being variable, it can also move.

A home equity investment moves the cost to the end

With an HEI, the second number is close to zero, because there are no monthly payments. The third number carries the weight. The CFPB's example is a homeowner who receives 10% of the home's value for a 20% stake in its future value, and it notes that "this 2x multiple means that the company would double their money before factoring in any home price appreciation." On a $500,000 home that stays flat, $50,000 received becomes a $100,000 starting point for the settlement, which some companies limit with a cap. In the CFPB's example, the cap is a rate equivalent to 18% annual interest on the payment.

Fees land on the first number. Point, for instance, charges "up to a 3.9% processing fee (subject to a $2,000 minimum)" and deducts its fees, along with appraisal and escrow costs, from the amount the homeowner receives.

Sources

Written by Kaz (pen name). Figures are copied from providers' published pages on the dates shown. We have not used these products. Corrections: contact form.