Home Equity Loan Calculator

What is a home equity loan?

A home equity loan lets you borrow a lump sum against the part of your home you own outright. Equity is the home's current market value minus everything you still owe on it, so a $600,000 house with a $250,000 mortgage has $350,000 of equity. Because the house secures the loan, rates are usually well below those on credit cards and unsecured personal loans.

The loan sits behind your first mortgage as a second lien, which is why it is often called a second mortgage. You receive the full amount at closing and repay it in equal monthly installments of principal and interest, usually over 5 to 30 years, at a rate that is normally fixed for the life of the loan. That makes the payment predictable and easy to budget.

Lenders limit how much you can borrow with the combined loan-to-value ratio: the total of the existing mortgage and the new loan divided by the home's appraised value. Most cap it at 80% to 85%, and some allow 90% or more for strong borrowers. With an 80% limit, the example home supports $480,000 of total debt, so up to $230,000 can be borrowed after the $250,000 mortgage.

Approval also depends on credit and income. Lenders commonly look for a credit score in the mid-600s or higher and a debt-to-income ratio of about 43% or less including the new payment, and they order an appraisal to confirm the value.

The risk is the same as with any mortgage: if you cannot pay, the lender can foreclose. Falling home prices can also leave you owing more than the house is worth, which makes it hard to sell or refinance.

M = P × r(1 + r)ⁿ ÷ [(1 + r)ⁿ − 1] · Available equity = home value × CLTV limit − mortgage balance

M

fixed monthly payment

P

amount borrowed

r

monthly interest rate (annual rate ÷ 12)

n

number of monthly payments

The real APR is the rate at which the payments repay only the cash you actually receive after fees, so it is higher than the note rate whenever there are closing costs.

Costs associated with a home equity loan

Home equity loans carry closing costs much like a first mortgage, though often smaller. Typical charges include an origination or application fee, an appraisal, a credit report, title search and title insurance, document preparation and government recording fees. Together they commonly run 2% to 5% of the loan amount.

Some lenders advertise no closing costs. They usually recover the money through a slightly higher interest rate, or require you to repay the waived fees if you close the loan within the first few years. Compare offers by their APR, which spreads fees across the life of the loan, rather than by the interest rate alone. Turning on the closing-cost option in the calculator shows that real APR: $7,500 of fees on the default $150,000 loan raises the effective rate from 8% to about 8.9%.

Fees can be paid in cash at closing or deducted from the loan proceeds. Deducting them reduces the cash you receive while leaving the payment unchanged. Interest may be tax-deductible if the money is used to buy, build or substantially improve the home that secures the loan and you itemize deductions; interest on money used for other purposes is not deductible.

Usage and alternatives to home equity loans

Because the money arrives as a single lump sum at a fixed rate, home equity loans suit large, one-time expenses with a known cost:

• Home improvements and repairs, which can add value to the property and may make the interest tax-deductible.
• Consolidating high-interest credit card or personal loan debt into one lower, fixed payment, provided the old balances are not run up again.
• Major expenses such as medical bills, a wedding or college tuition, though federal student loans usually offer better protections for education.
• Starting or expanding a business when other financing is expensive or unavailable.
• Emergency costs, though an emergency fund is a safer first line of defense.
• Home equity line of credit (HELOC): a revolving line, usually at a variable rate, that you draw on as needed and pay interest only on what you use. Better for ongoing projects with uncertain costs.
• Cash-out refinance: replaces the first mortgage with a larger one and pays out the difference. Worth considering when current mortgage rates are at or below your existing rate, since otherwise you reprice the whole balance higher.
• Personal loan: unsecured, so the house is not at risk, with faster approval and few fees, but rates are higher and terms shorter.
• Credit cards and 0% balance transfer offers: workable for small amounts that can be repaid within the promotional period.
• Reverse mortgage: for homeowners 62 and older, converts equity into payments without monthly loan payments, but reduces what is left for heirs and carries significant costs.

Frequently asked questions

Sources

• Consumer Financial Protection Bureau
• IRS Publication 936 – Home Mortgage Interest Deduction
• FTC – Home equity loans and lines of credit