Bankrate Equity Loan Calculator

Estimate your home equity loan payments and understand your borrowing costs.

Home Equity Loan Calculator

What is a Home Equity Loan?

A home equity loan is a type of loan where you borrow a lump sum of money against the equity you've built up in your home. Your home equity is the difference between your home's current market value and the amount you still owe on your mortgage. These loans are often referred to as "second mortgages" because they are secured by your home, just like your primary mortgage. They typically come with a fixed interest rate and a fixed repayment term, making them predictable for budgeting purposes.

Who should use a home equity loan? Homeowners who need a significant amount of cash for a specific purpose, such as home renovations, debt consolidation, education expenses, or major medical bills, might consider a home equity loan. It's particularly suitable for those who prefer a predictable monthly payment and want to leverage their home's value. However, it's crucial to remember that your home serves as collateral, meaning failure to repay the loan could lead to foreclosure.

Common misconceptions about home equity loans: One common misconception is that they are the same as home equity lines of credit (HELOCs). While both use home equity, a home equity loan provides a lump sum upfront, whereas a HELOC functions more like a credit card with a revolving credit line. Another misconception is that they are always cheaper than other forms of debt. While interest rates can be competitive, they are still a significant financial commitment that requires careful consideration. It's also sometimes thought that you can only use equity loans for home improvements, but the funds can generally be used for any purpose.

Home Equity Loan Formula and Mathematical Explanation

Understanding the math behind a home equity loan helps in making informed decisions. The core calculation determines your fixed monthly payment. This calculation is based on the loan principal, the interest rate, and the loan term.

The standard formula for calculating the monthly payment (M) of an amortizing loan is:

M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]

Let's break down the variables:

Variable Definitions for Loan Payment Formula

Variable	Meaning	Unit	Typical Range
M	Monthly Payment	Currency ($)	Varies based on loan
P	Principal Loan Amount	Currency ($)	$10,000 – $500,000+
i	Monthly Interest Rate	Decimal (e.g., 0.075 / 12)	0.00083 (0.1% APR / 12) to 0.025 (30% APR / 12)
n	Total Number of Payments	Count	12 (1 year) to 360 (30 years)

To use the formula:

1. Convert Annual Rate to Monthly Rate (i): Divide the annual interest rate (APR) by 12. For example, a 7.5% APR becomes 0.075 / 12 = 0.00625.
2. Calculate Total Number of Payments (n): Multiply the loan term in years by 12. A 15-year loan has 15 * 12 = 180 payments.
3. Plug into the Formula: Substitute P, i, and n into the formula to find M.

Total Interest Paid: This is calculated by multiplying the monthly payment (M) by the total number of payments (n) and then subtracting the original principal loan amount (P). Total Interest = (M * n) – P.

Our Bankrate equity loan calculator automates these calculations for you, providing instant estimates.

Practical Examples (Real-World Use Cases)

Let's illustrate how a home equity loan might work in practice:

Example 1: Home Renovation Project

Sarah wants to renovate her kitchen, which she estimates will cost $60,000. She has $150,000 in equity in her home (valued at $400,000 with $250,000 remaining on her mortgage). She applies for a home equity loan.

• Loan Amount (P): $60,000
• Annual Interest Rate: 7.0%
• Loan Term: 10 years (120 months)

Using the calculator or formula:

• Monthly Interest Rate (i) = 7.0% / 12 = 0.005833
• Total Payments (n) = 10 * 12 = 120
• Estimated Monthly Payment (M) ≈ $700.64
• Total Interest Paid ≈ ($700.64 * 120) – $60,000 = $84,076.80 – $60,000 = $24,076.80

Interpretation: Sarah would pay approximately $700.64 per month for 10 years. Over the life of the loan, she would pay about $24,076.80 in interest. This allows her to finance her dream kitchen with predictable payments.

Example 2: Debt Consolidation

John has $30,000 in high-interest credit card debt and personal loans. He decides to take out a home equity loan to consolidate this debt into a single, lower-interest payment.

• Loan Amount (P): $30,000
• Annual Interest Rate: 8.5%
• Loan Term: 15 years (180 months)

Using the calculator or formula:

• Monthly Interest Rate (i) = 8.5% / 12 = 0.007083
• Total Payments (n) = 15 * 12 = 180
• Estimated Monthly Payment (M) ≈ $287.17
• Total Interest Paid ≈ ($287.17 * 180) – $30,000 = $51,690.60 – $30,000 = $21,690.60

Interpretation: John's monthly payment drops significantly compared to his individual debts, and he has a clear end date for repayment. However, he will pay a substantial amount in interest over 15 years. This strategy requires discipline to avoid accumulating new debt.

Explore these scenarios using our home equity loan calculator to see how different rates and terms affect your payments.

How to Use This Bankrate Equity Loan Calculator

Our calculator is designed for simplicity and accuracy, helping you quickly estimate your potential home equity loan costs. Follow these steps:

1. Enter Loan Amount: Input the total amount of money you wish to borrow. This is the principal sum for your loan.
2. Input Annual Interest Rate: Enter the Annual Percentage Rate (APR) you expect to receive. This rate significantly impacts your monthly payment and total interest paid.
3. Specify Loan Term: Select the duration of the loan in years. A longer term generally means lower monthly payments but higher total interest paid over time.
4. Click 'Calculate': Once all fields are populated, click the 'Calculate' button. The calculator will instantly display your estimated monthly payment, total interest, and other key figures.
5. Review Results: Examine the primary result (Estimated Monthly Payment) and the intermediate values (Monthly Interest Rate, Total Payments, Total Interest Paid). The table provides a detailed summary.
6. Analyze the Chart: The amortization chart visually breaks down how much of each payment goes towards principal versus interest over the loan's life.
7. Use 'Copy Results': If you need to share these estimates or save them, click 'Copy Results'. This will copy the key figures and assumptions to your clipboard.
8. Reset Values: If you want to start over or try different scenarios, click the 'Reset' button to return the calculator to its default settings.

Decision-Making Guidance: Use these estimates to compare loan offers, determine affordability, and understand the long-term financial commitment. Ensure the estimated monthly payment fits comfortably within your budget. Remember that these are estimates; your actual loan terms may vary based on lender approval and final rate negotiation.

Key Factors That Affect Home Equity Loan Results

Several factors influence the terms and costs associated with a home equity loan. Understanding these can help you secure better rates and manage your borrowing:

1. Credit Score: This is arguably the most critical factor. Lenders use your credit score to assess your creditworthiness and risk. Higher scores typically qualify you for lower interest rates, reducing your monthly payments and total interest paid. A score below 620 might make it difficult to qualify or result in higher rates.
2. Loan-to-Value (LTV) Ratio: This ratio compares the amount you want to borrow against the value of your home. Lenders usually prefer an LTV of 80% or lower for combined loan-to-value (primary mortgage + home equity loan). A lower LTV indicates less risk for the lender and may result in better terms.
3. Interest Rate Environment: Prevailing market interest rates significantly impact the APR offered on home equity loans. If general interest rates are high, expect higher rates on your loan. Conversely, lower market rates can lead to more favorable loan terms.
4. Loan Term: The length of the repayment period affects both your monthly payment and the total interest paid. Longer terms mean lower monthly payments but significantly more interest over time. Shorter terms increase monthly payments but reduce the overall interest cost.
5. Income and Debt-to-Income Ratio (DTI): Lenders assess your ability to repay the loan by looking at your income and existing debt obligations. A lower DTI ratio (typically below 43%) suggests you have more disposable income available to handle the new loan payment, making you a less risky borrower.
6. Home Equity Amount: The amount of equity you have in your home directly determines how much you can potentially borrow. Lenders typically allow you to borrow up to a certain percentage (often 80-85%) of your home's value, minus your outstanding mortgage balance. More equity means greater borrowing capacity.
7. Lender Fees: While advertised rates are important, be aware of associated fees, such as origination fees, appraisal fees, title insurance, and recording fees. These can add to the overall cost of the loan and should be factored into your decision. Some lenders offer no-closing-cost options, but these might come with slightly higher interest rates.
8. Economic Conditions and Inflation: Broader economic factors can influence lender policies and interest rate trends. High inflation might lead central banks to raise interest rates, subsequently increasing the cost of borrowing for home equity loans.

Consider these factors when comparing offers from different lenders. Our home equity loan calculator helps you see the impact of rate and term, but remember to inquire about all fees.

Frequently Asked Questions (FAQ)

Q1: What is the difference between a home equity loan and a HELOC?

A home equity loan provides a lump sum of cash upfront with a fixed interest rate and repayment schedule. A Home Equity Line of Credit (HELOC) is a revolving credit line, similar to a credit card, where you can draw funds as needed up to a certain limit during a draw period, often with a variable interest rate.

Q2: Can I use a home equity loan for anything?

Yes, generally you can use the funds from a home equity loan for any purpose, including home improvements, debt consolidation, education costs, medical expenses, or major purchases. The lender typically doesn't dictate how you spend the money.

Q3: Is a home equity loan tax-deductible?

Interest paid on a home equity loan is tax-deductible only if the loan proceeds are used to buy, build, or substantially improve the home that secures the loan, and the loan is treated as a mortgage. Consult a tax professional for personalized advice.

Q4: What happens if I can't make my home equity loan payments?

If you default on a home equity loan, the lender can initiate foreclosure proceedings on your home, as it serves as collateral for the loan. It's crucial to borrow only what you can comfortably afford to repay.

Q5: How much equity do I need to qualify for a home equity loan?

Lenders typically require you to have a certain amount of equity, often demonstrated by a combined loan-to-value (CLTV) ratio of 80% or less. This means the sum of your primary mortgage balance and the desired home equity loan amount should not exceed 80% of your home's appraised value.

Q6: Are there closing costs associated with home equity loans?

Yes, many home equity loans come with closing costs, similar to a primary mortgage. These can include appraisal fees, origination fees, title search fees, recording fees, and attorney fees. Some lenders offer "no-closing-cost" options, but these may have higher interest rates.

Q7: How long does it take to get approved for a home equity loan?

The approval process can vary, but it typically takes anywhere from a few days to a few weeks. It involves application, appraisal of your home, underwriting, and closing. Factors like the completeness of your application and the lender's efficiency play a role.

Q8: Should I use a home equity loan to pay off credit card debt?

It can be a strategic move if the home equity loan's interest rate is significantly lower than your credit card rates, and you are disciplined enough to avoid running up new debt. It consolidates debt into one payment, potentially saving money on interest and simplifying finances. However, it converts unsecured debt into secured debt, putting your home at risk if payments are missed.