Home Equity Loan Calculator
How to Calculate Your Home Equity Loan Borrowing Power
A Home Equity Loan, often called a "second mortgage," allows you to borrow against the difference between your home's current market value and the balance remaining on your mortgage. This calculator helps you determine how much cash you can extract from your home and what the monthly payments would look like.
The 80% LTV Rule
Most lenders allow homeowners to borrow up to 80% or 85% of their home's total value, combining both your primary mortgage and the new equity loan. This is known as the Loan-to-Value (LTV) ratio. For example, if your home is worth $500,000, an 80% LTV limit means the total debt on the property cannot exceed $400,000. If you already owe $300,000, your maximum home equity loan would be $100,000.
Example Calculation
Imagine your home is valued at $400,000 and you owe $200,000 on your mortgage. You want a 15-year home equity loan at 7% interest.
- Step 1 (Max Loan): ($400,000 x 0.80) – $200,000 = $120,000 available limit.
- Step 2 (Payment): If you borrow $50,000 for 15 years at 7%, your monthly payment would be approximately $449.41.
Benefits of Home Equity Loans
Home equity loans typically offer lower interest rates compared to personal loans or credit cards because the debt is secured by your property. Furthermore, if the funds are used for substantial home improvements, the interest may be tax-deductible (consult a tax professional for your specific situation).
Key Risks to Consider
Because your home serves as collateral, failure to make payments can lead to foreclosure. Additionally, if home values in your area drop, you could end up "underwater," meaning you owe more than the home is worth.