How the Home Equity Loan Calculator Works
Home equity is the part of your home that you own: its value minus what you still owe on your mortgage. A home equity loan lets you borrow against that equity. You get a lump sum, at a fixed interest rate, and you repay it in equal monthly payments. People use it for renovations, to pay off other debts, or for big expenses. The Home Equity Loan Calculator shows how much you can borrow and what the loan will cost.
What you enter
- Current value of your home: an appraisal, or a realistic estimate.
- Mortgage you still owe: your current balance. Include any other loan that is secured on the home.
- Most the lender lends against your home: the combined loan-to-value limit, often 80% to 85%.
- Amount, rate and term: the loan you want.
- Closing costs: the fees for the loan, as a percentage. They are taken out of the money you receive.
Step 1: how much you can borrow
Lenders do not lend against all of your equity. They keep a cushion. They limit the total of your mortgage and the new loan to a share of the home's value, called the combined loan-to-value ratio (CLTV):
equity = home value - mortgage most you can borrow = home value x lender limit - mortgage
If you ask for more than that, the calculator tells you the most you could borrow.
Step 2: the payment
The yearly rate is divided by 12 to get the monthly rate r. With n monthly payments and a loan of P, the standard formula gives the payment:
payment = P x r x (1 + r)^n / ((1 + r)^n - 1)
Each month, interest is charged on what you still owe, and the rest of the payment reduces the loan.
Step 3: the true cost (APR)
Closing costs are taken from the money you receive, but you repay the whole loan. So the real rate you pay is a little higher than the interest rate. The calculator finds the APR, the yearly rate at which your payments are worth exactly the money you received. When there are no closing costs, the APR is the same as the interest rate.
A worked example
Your home is worth $400,000 and you owe $240,000. Your lender lends up to 85% of the home's value. So your equity is $160,000, but the most you could borrow is $400,000 x 85% - $240,000 = $100,000. You borrow $50,000 at 8.5% for 15 years, with 2% closing costs.
| Result | Amount |
|---|---|
| Monthly payment | $492.37 |
| Closing costs | $1,000 |
| Cash you receive | $49,000 |
| Total interest | $38,626.56 |
| Total you repay | $88,626.56 |
| True cost (APR) | 8.84% |
| Loan to value before and after | 60% and 72.5% |
| Equity left in the home | $110,000 |
Chart: how the value of your home is divided
Mortgage ████████████████████████████████████████ 60% $240,000 New loan ████████ 12.5% $50,000 Equity left ██████████████████ 27.5% $110,000
How much you could borrow
The lender's limit changes the answer a lot. On the same home and mortgage:
| Lender limit | Most you could borrow |
|---|---|
| 75% | $60,000 |
| 80% | $80,000 |
| 85% | $100,000 |
| 90% | $120,000 |
Chart: what you still owe on the loan
Start ████████████████████████████████████████ $50,000 Year 3 ███████████████████████████████████ $44,355 Year 6 █████████████████████████████ $37,078 Year 9 ██████████████████████ $27,695 Year 12 ████████████ $15,597 Year 15 (paid off)
Things to think about
- Your home is the security. If you cannot make the payments, the lender can take your home. Borrow only what you can comfortably repay.
- Compare with other options. A home equity line of credit (HELOC) has a variable rate and lets you borrow as you need. A cash-out refinance replaces your mortgage. A personal loan does not use your home.
- Check the costs. Ask about the closing costs, the appraisal fee and any early repayment fee.
- Tax rules. In some places, the interest may be deductible if the money is used to improve the home. The rules change, so ask a tax professional.
What this calculator does not include
- Your credit score and income, which the lender will check.
- Loans with variable rates, such as a HELOC, and interest-only periods.
- The appraisal fee and other costs, unless you include them in the closing costs percentage.
- Small rounding differences. Lenders round each payment to the cent.
This tool gives an estimate for general information only. It is not financial advice. Your lender can give you exact terms.