Home Equity Loan Calculator
Calculate payments for a fixed-rate home equity loan (second mortgage) and compare its costs to a HELOC.
Home Equity
Moderate Risk
Using equity for home improvements is tax-deductible and can increase home value.
Your Home Equity
45.0% of home value
Historical average: 3-4% per year
Home Value Summary
Equity Position
Loan Summary
Loan Amortization (First 5 Years)
| Year | Principal | Interest | Balance |
|---|---|---|---|
| 1 | $1,725 | $4,184 | $48,275 |
| 2 | $1,877 | $4,031 | $46,398 |
| 3 | $2,043 | $3,865 | $44,355 |
| 4 | $2,224 | $3,685 | $42,132 |
| 5 | $2,420 | $3,488 | $39,712 |
Current Equity Breakdown
Borrowing by LTV Ratio
Home Equity Tips
- Tax deduction: Interest may be deductible if used for home improvements
- Keep equity cushion: Maintain at least 20% equity for financial safety
- Compare rates: Shop multiple lenders for the best terms
- HELOC flexibility: Only pay interest on what you draw
- Consider refinance: Cash-out refi may offer lower rates than equity loans
- Watch for fees: Appraisal, origination, and closing costs can add up
Understanding Home Equity Loans: Unlock Your Home's Value
A home equity loan, often called a "second mortgage," allows you to borrow against the equity you've built in your home. You receive a lump sum with a fixed interest rate and repay it over a set term (typically 5-30 years) with predictable monthly payments. Unlike a HELOC (Home Equity Line of Credit), which works like a credit card, a home equity loan provides all funds upfront. It's ideal for large, one-time expenses like home renovations, debt consolidation, or major purchases where you know exactly how much you need.
Essential Home Equity Loan Terms
Home Equity
The portion of your home you truly own, calculated as current home value minus outstanding mortgage balance. For example, if your home is worth $400,000 and you owe $250,000, you have $150,000 in equity (37.5%). Equity builds through mortgage payments reducing your balance and property value appreciation over time.
Loan-to-Value Ratio (LTV)
The combined total of all loans against your home divided by its current value, expressed as a percentage. Most lenders limit home equity loans to 80-90% combined LTV (CLTV), meaning your first mortgage plus home equity loan can't exceed 80-90% of your home's value. Lower LTV means better rates and terms.
Fixed-Rate Home Equity Loan
A second mortgage with a fixed interest rate that never changes, providing predictable monthly payments throughout the loan term. You receive all funds at closing as a lump sum. This differs from a HELOC, which has variable rates and allows you to draw funds as needed during a draw period.
HELOC (Home Equity Line of Credit)
A revolving credit line secured by your home equity, working like a credit card. Features a draw period (5-10 years) where you can borrow, repay, and borrow again, followed by a repayment period (10-20 years). HELOCs have variable interest rates that fluctuate with market rates, offering flexibility but less payment predictability than fixed-rate loans.
Second Mortgage Position
Home equity loans are typically in "second position" behind your primary mortgage. If you default and the home is foreclosed, the first mortgage is paid off before the home equity loan, making it riskier for lenders. This is why home equity loan rates are typically 1-3 percentage points higher than first mortgage rates.
Closing Costs and Fees
Home equity loans typically have closing costs of 2-5% of the loan amount, including appraisal fees ($400-600), application fees, title search, attorney fees, and recording fees. Some lenders offer "no closing cost" loans but charge higher interest rates to compensate. Always compare total cost, not just the rate.
How Home Equity Loans Work: Complete Process
Follow these steps to understand and obtain a home equity loan:
Calculate Your Available Home Equity
Determine how much equity you can access by calculating: (Home Value × Max LTV%) - Existing Mortgage Balance. Most lenders allow 80-90% combined LTV. Get a professional appraisal or use online home value estimates as a starting point.
Example Calculation:
Decide Between Home Equity Loan vs. HELOC
Choose based on your needs. A home equity loan provides a lump sum with fixed rates for one-time expenses. A HELOC offers flexible borrowing with variable rates for ongoing or uncertain costs. Consider payment predictability, rate risk, and how you'll use the funds.
Quick Comparison:
Check Eligibility Requirements
Lenders typically require: credit score 620+ (680+ for best rates), debt-to-income ratio below 43%, sufficient equity (15-20% minimum), stable income history (2+ years), and on-time mortgage payments for the past 12-24 months.
Typical Requirements:
- • Credit Score: 620 minimum, 700+ for best rates
- • Debt-to-Income: Below 43% (including new loan)
- • Home Equity: At least 15-20% remaining after loan
- • Income: Verifiable, stable employment (2+ years)
- • Payment History: No late mortgage payments (12 months)
- • Property: Owner-occupied primary residence (usually)
Shop Lenders and Compare Offers
Compare at least 3-5 lenders including your current mortgage lender, banks, credit unions, and online lenders. Look at APR (not just rate), closing costs, loan terms, prepayment penalties, and time to funding. Rate differences of 0.5% can save thousands.
Rate Impact Example ($75,000 loan, 15 years):
A half-point rate difference saves nearly $8,000 over the loan term!
Complete Application and Provide Documentation
Submit a complete application with all required documents. The process typically takes 2-6 weeks from application to closing. An appraisal is usually required. Review the Loan Estimate within 3 days and Closing Disclosure at least 3 days before closing.
Required Documentation:
- • Income verification: Pay stubs (last 2 months), W-2s (last 2 years), tax returns
- • Asset documentation: Bank statements (last 2-3 months), investment accounts
- • Debt information: Credit card statements, loan statements, monthly obligations
- • Property info: Homeowners insurance, property tax statements, HOA documents
- • Identity: Driver's license, Social Security number, proof of residence
- • First mortgage: Current mortgage statement, payment history
Self-employed? You'll need additional documentation like P&L statements and business tax returns.
Home Equity Loan vs. HELOC: Complete Comparison
Understanding the key differences between home equity loans and HELOCs is critical for choosing the right product for your financial situation:
| Feature | Home Equity Loan | HELOC |
|---|---|---|
| Disbursement | Lump sum at closing | Draw as needed up to limit |
| Interest Rate | Fixed for entire term | Variable, tied to prime rate |
| Payment | Same amount monthly | Varies by balance and rate |
| Loan Term | 5-30 years, typically 10-15 | 10-year draw + 10-20 year repay |
| Closing Costs | 2-5% of loan amount | Often lower or waived |
| Tax Deductibility | Interest deductible if for home improvement | Interest deductible if for home improvement |
| Best For | Known expense, want payment stability | Ongoing costs, uncertain amount needed |
| Rate Risk | None - locked in | High - can increase significantly |
General rule: Choose a home equity loan for predictability and known expenses (major renovation, debt payoff). Choose a HELOC for flexibility and uncertain costs (ongoing remodeling, backup emergency fund).
Home Equity Loan Best Practices
Use Funds Strategically for Value-Adding Purposes
Prioritize uses that increase your net worth: home improvements (ROI 50-100%+), high-interest debt consolidation (saving 10-20% APR), education/skills that boost income, or starting a business. Avoid depreciating purchases like vacations or vehicles.
Best uses: Kitchen/bath remodels, debt consolidation from 18%+ credit cards, investment property down payment, business funding with solid ROI.
Maintain at Least 20% Equity Cushion
Don't borrow the maximum available equity. Keep at least 20% equity buffer to protect against market downturns, avoid being underwater if values drop, and maintain financial flexibility for unexpected needs or opportunities like relocating.
Example: With $400K home and $250K mortgage (37.5% equity), borrowing max $90K leaves only 15% equity—risky. Borrow $50K to maintain 25% equity cushion.
Understand You're Risking Your Home
Home equity loans are secured by your house—if you can't pay, you risk foreclosure and losing your home. Only borrow what you can comfortably afford with a clear repayment plan. Consider unemployment insurance or payment protection if available.
Rule: New payment shouldn't exceed 15% of take-home income. Maintain 6-month emergency fund even after borrowing. Have backup income sources.
Compare Total Cost, Not Just Monthly Payment
A longer loan term reduces monthly payments but significantly increases total interest paid. A 15-year loan at 8% costs far less than a 30-year loan at 7.5% despite the higher rate. Always compare total interest over the full term.
Example: $75K at 8% for 15 years = $52K interest. Same loan for 30 years = $127K interest—$75K more paid just for lower monthly payment!
Factor in All Costs Beyond the Rate
Include closing costs ($2,000-$5,000+), appraisal fees ($400-600), annual fees (some HELOCs), early closure penalties, and opportunity cost of tying up equity. A "no closing cost" loan with 0.5% higher rate costs more over time.
Compare: $75K loan with $3K closing costs at 7.5% vs. no-cost loan at 8%. Break-even is ~4-5 years. Keep loan longer? Pay closing costs for lower rate.
Time Your Borrowing Strategically
Borrow when you have strong income, good credit (for best rates), and stable job situation. Avoid borrowing just before retirement, during job transitions, or when home values are near market peaks. Consider interest rate environment and trends.
Best timing: Stable employment, 700+ credit score, home value recently increased, interest rates reasonable or falling, 5+ years before retirement.
Make Extra Principal Payments When Possible
Even small extra payments significantly reduce interest and loan term. An extra $100/month on a $75K, 15-year loan at 8% saves $9,000+ in interest and pays it off 3 years early. Ensure no prepayment penalties before committing.
Strategy: Make biweekly payments (half payment every 2 weeks = 13 full payments/year instead of 12) or round up payments to nearest $50 or $100.
Consider Tax Implications and Deductibility
Home equity loan interest is tax-deductible ONLY if used for buying, building, or substantially improving your home (TCJA 2017 rules). Debt consolidation, vacations, or cars don't qualify. Consult a tax professional to understand your specific situation.
Deductible: Kitchen remodel, new roof, addition. NOT deductible: Paying off credit cards, buying a car, vacation, tuition. Keep receipts for home improvements.
Common Home Equity Loan Mistakes to Avoid
Using Home Equity for Depreciating Assets or Consumables
Borrowing against your home to fund vacations, cars, weddings, or everyday expenses is extremely dangerous. You're converting unsecured debt (could walk away) into secured debt (lose your house). The asset depreciates while you pay interest for 10-30 years.
Better approach: Only use home equity for value-adding purposes: home improvements, high-interest debt consolidation, education with clear ROI, or investment property. Save and pay cash for consumables.
Borrowing Maximum Available Equity
Maxing out at 85-90% CLTV leaves you extremely vulnerable to home value drops, removes financial flexibility, and makes refinancing or selling difficult if you need to relocate. Market corrections can quickly put you underwater with negative equity.
Better approach: Keep at least 20-25% equity cushion. If home values drop 10-15% (common in downturns), you're still above water and have options. Don't borrow just because you can.
Consolidating Debt Without Fixing Spending Habits
Paying off credit cards with home equity without addressing overspending leads to disaster: you free up credit cards, run them up again, and now have both the home equity loan payment AND new credit card debt—plus risk losing your home.
Better approach: First, address spending habits and create a realistic budget. Close or freeze credit cards after paying them off. Only consolidate if you're committed to lifestyle changes and not using credit cards again.
Ignoring Market Conditions and Home Value Trends
Borrowing heavily when your local real estate market is at peak prices or showing signs of softening is risky. If values drop 10-20%, you lose equity cushion and could become underwater, especially if you borrowed near maximum LTV limits.
Better approach: Research local market trends before borrowing. If prices seem inflated or area economy weakening, borrow conservatively. Get a professional appraisal, not just online estimates which can be inflated.
Extending Loan Term to Reduce Monthly Payment
Choosing a 30-year home equity loan just to lower monthly payments dramatically increases total interest paid. You could pay 2-3 times more interest than a shorter term, and you're still paying for today's expenses 30 years from now—potentially into retirement.
Better approach: Choose the shortest term you can afford (10-15 years typically). If you can't afford a reasonable term, you're borrowing too much. Longer terms should only be for very large, unavoidable expenses.
Not Shopping Around for Best Rates
Many homeowners accept their current mortgage lender's offer without comparing rates. Home equity loan rates can vary 1-2 percentage points between lenders—that's $10,000-$20,000+ difference over the loan term on a $75,000 loan.
Better approach: Get quotes from minimum 3-5 lenders: your bank, 2-3 online lenders, credit unions, and your current mortgage lender. Compare APR (includes fees), not just interest rate. Rate shopping within 14 days counts as one credit inquiry.
Misunderstanding Tax Deduction Rules
Many borrowers assume all home equity loan interest is tax-deductible. Since the Tax Cuts and Jobs Act (2017), interest is ONLY deductible if used for home improvements. Using it for debt consolidation, cars, or tuition makes interest non-deductible, increasing effective cost.
Better approach: Consult a CPA before borrowing to understand tax implications. Keep detailed records and receipts if using for home improvements. If not deductible, factor higher after-tax cost into your decision—you may be better off with other financing.
Borrowing Close to Retirement Without a Plan
Taking a 15-20 year home equity loan at age 55-65 means making payments into or through retirement on reduced fixed income. If you can't make payments, you risk losing your home at a vulnerable life stage with limited options to recover financially.
Better approach: If near retirement (within 10 years), choose shorter terms you'll pay off before retiring, ensure payments fit retirement budget, or consider alternatives like reverse mortgages (if 62+), downsizing, or working longer before borrowing.
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Frequently Asked Questions
How much home equity can I borrow?
Most lenders allow you to borrow up to 80-90% combined loan-to-value (CLTV), meaning your first mortgage plus home equity loan can't exceed 80-90% of your home's current value. Calculate available equity: (Home Value × Max CLTV%) - Current Mortgage Balance. Example: $400,000 home with $250,000 mortgage at 85% CLTV = ($400,000 × 0.85) - $250,000 = $90,000 available. Factors affecting limits: Credit score (higher scores = higher LTV allowed), debt-to-income ratio (must stay below 43%), income stability (2+ years employment), and property type (owner-occupied primary residences get best terms). Best practice: Don't borrow the maximum—maintain at least 20% equity cushion to protect against market downturns and maintain financial flexibility. Borrowing 70-75% CLTV is generally safer than maxing out at 85-90%.
What's the difference between a home equity loan and a HELOC?
Home Equity Loan: A "second mortgage" where you receive a lump sum at closing with a fixed interest rate and fixed monthly payments over a set term (5-30 years). You pay the same amount every month until paid off. HELOC (Home Equity Line of Credit): A revolving credit line that works like a credit card—draw funds as needed up to your limit during a "draw period" (5-10 years), with variable interest rates that fluctuate monthly. After the draw period, you enter a "repayment period" (10-20 years) where you can't borrow more and must pay back the balance. Choose home equity loan if: You need a specific amount for a one-time expense (major renovation, debt payoff), want payment predictability, and prefer fixed rates for budgeting. Choose HELOC if: You have ongoing or uncertain costs (phased renovation, backup emergency fund), want flexibility to draw only what you need, and can tolerate variable payment amounts. Key difference: Home equity loan = predictable but less flexible. HELOC = flexible but unpredictable (rates and payments can increase).
Is home equity loan interest tax deductible?
It depends on how you use the funds. Under the Tax Cuts and Jobs Act (2017), home equity loan interest is ONLY tax-deductible if used to "buy, build, or substantially improve" the home securing the loan. Deductible uses: Major renovations (kitchen/bath remodel), additions (new room, garage), structural repairs (new roof, foundation work), or buying the property itself. NOT deductible: Debt consolidation, paying off credit cards, buying a car, tuition, medical expenses, vacations, or any non-home improvement purpose. Limits: You can deduct interest on combined mortgage and home equity debt up to $750,000 ($375,000 if married filing separately). Important: Keep detailed receipts and documentation of home improvement expenses. If audited, you must prove the funds were used for qualifying purposes. Always consult a CPA before assuming deductibility—your situation may have additional complexities based on when you bought your home, your total debt levels, and whether you itemize deductions (standard deduction may be better).
What credit score do I need for a home equity loan?
Credit score requirements vary by lender, but here's the general landscape: Minimum approval (620-639): You may qualify but expect high interest rates (9-12%+), lower loan amounts (70-75% CLTV max), and stricter income/DTI requirements. Fair rates (640-679): Moderate rates (7.5-9%), standard terms up to 80% CLTV, and reasonable approval odds. Good rates (680-719): Competitive rates (6.5-7.5%), 85% CLTV available, easier approval. Best rates (720+): Lowest rates (5.5-6.5%), maximum 85-90% CLTV, best terms and fees. Other factors beyond score: Debt-to-income ratio (below 43% required), payment history on current mortgage (12+ months on-time), income stability (2+ years same employer), and remaining equity (at least 15-20% after loan). Improving your odds: If score is 650-700, paying down credit cards below 30% utilization can boost score 20-50 points in 30-60 days. Dispute any errors on credit report. Even a 20-point improvement can lower your rate 0.5-1%, saving thousands over the loan term. If your score is below 640, work on improving it for 3-6 months before applying—the rate savings will far exceed the wait time.
Should I get a home equity loan or cash-out refinance?
The best choice depends on your current mortgage rate, the amount you need, and your financial goals. Choose home equity loan if: (1) Your current first mortgage rate is excellent (below current market rates)—don't give up a 3-4% rate by refinancing. (2) You need a smaller amount ($75K or less typically). (3) You want to keep your current mortgage term and payment. (4) You want faster closing (2-4 weeks vs. 4-6 weeks for refinance). Choose cash-out refinance if: (1) Current rates are similar to or lower than your existing mortgage rate—you can access cash without keeping a higher rate. (2) You need a large amount (over $100K). (3) You want to consolidate into one payment instead of two. (4) You want to adjust your mortgage term (e.g., switch from 30-year to 15-year). Cost comparison: Home equity loans have lower closing costs ($2,000-$5,000) but higher interest rates (typically 1-3 points above first mortgage rates). Cash-out refinances have higher closing costs ($3,000-$6,000+) but one blended rate. Example scenario: Current mortgage: $250K at 3.5%. Need $75K. Home equity loan at 7.5% = keep 3.5% on $250K + 7.5% on $75K. Cash-out refi: $325K total at 6.5% = lose your 3.5% rate. In this case, home equity loan is better—you're not giving up your great rate.
What happens to my home equity loan if I sell my house?
You must pay off the home equity loan when you sell. Both your first mortgage and home equity loan (second mortgage) are paid from the sale proceeds at closing before you receive any money. Process: Sale proceeds go to: (1) Real estate commissions and closing costs. (2) First mortgage payoff. (3) Home equity loan payoff. (4) Remaining funds to you as net proceeds. Example: Home sells for $450,000. Costs/commissions: $30,000. First mortgage balance: $250,000. Home equity loan balance: $50,000. Net to you: $450,000 - $30,000 - $250,000 - $50,000 = $120,000. Important considerations: Ensure you have enough equity for both loans plus selling costs—if underwater, you must bring cash to closing or negotiate a short sale. Some home equity loans have prepayment penalties for paying off within first 2-3 years—review your loan documents. If moving frequently (every 3-5 years), factor in the closing costs and whether you'll recoup them. Planning tip: Calculate break-even before taking a home equity loan if you might sell soon. If selling within 2-3 years, the closing costs may outweigh benefits—consider alternatives like personal loans or waiting.
Ready to Calculate Your Home Equity?
Use our comprehensive home equity loan calculator above to determine how much you can borrow, compare loan vs. HELOC options, and see exactly how different terms affect your payments and total costs.
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