Home Equity Loan Calculator

What is a home equity loan?

A home equity loan lets homeowners borrow against the equity they’ve built in their property. Equity is the difference between your home's market value and the outstanding balance on any existing mortgage.

Sometimes, home equity loans are called "second mortgages" because they're an additional loan on top of your primary mortgage.

How a home equity loan works

• Loan amount - Typically, lenders allow you to access a percentage of your home equity (often up to around 80%) based on the appraised value and your credit score.

• Fixed amount - A home equity loan is usually paid as a lump sum. You make repayments over a set period (typically 5 to 30 years) at a fixed interest rate.

• Collateral - Your home serves as collateral. So, if you default, the lender has the right to foreclose on the property to recover the debt.

• Repayment terms - You typically get fixed repayment terms with a predetermined monthly payment schedule and interest rate.

Popular uses for home equity loans

You could be considering a home equity loan for a few reasons. Here are some of the most popular uses.

Home renovations and improvements

Financing home renovations, repairs, or upgrades is one of the most popular reasons to take out a home equity loan. You might want to remodel your kitchen, add new rooms, update bathrooms, or install energy-efficient systems.

Renovations can increase your home’s market value. They often lead to a return on investment that justifies the cost of the loan.

Borrowing for improvements that boost long-term value is a savvy use of equity. But check that the loan’s repayment terms and renovation costs align with the anticipated value increase.

Debt consolidation

You might use a home equity loan to consolidate high-interest debt like credit card balances, personal loans, and medical bills into one manageable monthly payment.

Home equity loans typically offer lower interest rates than credit cards. Consolidating debts can reduce monthly interest costs and make payments more predictable. This can provide substantial savings and simplify debt repayment, especially when consolidating multiple high-interest balances.

With debt consolidation, remember this: Using your home as collateral also introduces risk, and missed payments could result in foreclosure.

Major life expenses

Some homeowners use home equity loans to cover significant, necessary expenses. These may include college tuition, medical bills, or other unexpected costs.

A home equity loan can offer a lower-interest financing option. Education, for instance, is often seen as a worthwhile investment in future earning potential.

Investment opportunities

Some homeowners use home equity to invest in opportunities. You may want to buy a rental property, start a business, or secure investment vehicles.

This route can provide relatively low-cost capital for ventures with high return potential. Using home equity to diversify income sources might be part of your broader financial strategy.

HELOCs vs. home equity loans

The central difference between home equity loans and home equity lines of credit (HELOCs) lies in how you access and repay the funds. Both options let you borrow against the equity in your home, but they operate in distinct ways:

FeatureHome Equity LoanHELOCStructureLump sum, fixed amountRevolving line of credit, borrow as neededInterest RateFixedVariable (can fluctuate with market)RepaymentFixed monthly payments, principal + interestInterest-only during draw, principal + interest in repaymentBest ForLarge, one-time expensesOngoing or unpredictable expensesDraw PeriodNot applicableUsually 5-10 yearsCollateral RiskRisk of foreclosure if defaultedRisk of foreclosure if defaulted

Loan structure and access to funds

Home equity loan:

• A home equity loan is a lump sum payment upfront. You begin repaying it in fixed monthly installments.

• The loan term is usually fixed, ranging from 5 to 30 years.

• It's often called a "second mortgage" and has a structured repayment plan.

HELOC:

• A HELOC works more like a credit card or revolving line of credit. The lender approves a maximum credit limit based on your home equity.

• You can draw from it as needed during the “draw period,” typically 5 to 10 years.

• You only pay interest on the amount you borrow, not on the entire limit, and can borrow, repay, and re-borrow funds during the draw period.

• After the draw period, there’s usually a repayment period, during which no new borrowing is allowed.

• You must pay back both principal and interest on the outstanding balance.

Interest rates

Home equity loan:

• Typically a fixed interest rate, meaning monthly payments remain the same over the life of the loan.

• A fixed rate helps with budgeting and long-term financial planning since you know exactly how much you’ll pay each month.

HELOC:

• Has a variable interest rate, so the rate (and monthly payments) can fluctuate based on changes in the prime rate or other index rates.

• Variable rates can be lower initially, but they carry the risk of increasing over time, making budgeting more challenging.

Repayment terms

Home equity loan:

• Repayment begins immediately after receiving the lump sum.

• Payments are fixed and include principal and interest, similar to a traditional mortgage.

HELOC:

• During the draw period, you have the option to make interest-only payments.

• You enter a repayment period where you must repay the principal and any remaining interest after the draw period.

• This two-phase approach (draw and repayment) can lead to significantly higher payments in the repayment period if you only made interest payments initially.

Best use cases

Home equity loan:

• Best for large, one-time expenses, like home renovations and debt consolidation where a fixed loan amount and stable payments are beneficial.

• Ideal when you know the exact amount you need upfront and want predictability in repayments.

HELOC:

• Ideal for ongoing or unpredictable expenses where you need flexibility in accessing funds over time.

• Suitable if you prefer a line of credit you can tap into as needs arise, with the option to borrow only what’s necessary.

Risks and considerations

Home equity loan:

• You have less flexibility to adjust to changing financial circumstances because it’s a fixed loan with set payments.

• Defaulting on payments could result in foreclosure since the home serves as collateral.

HELOC:

• The variable interest rate can make payments unpredictable, potentially leading to higher monthly payments.

• If the property’s value declines, you could owe more than the home is worth, especially if interest rates increase substantially.

Pros and cons of home equity loans

Home equity loans offer several benefits, but they also come with risks and considerations. Here’s a detailed look at the pros and cons:

Pros of home equity loans

• Lower interest rates - Home equity loans usually have lower interest rates. This makes borrowing more affordable and reduces the total interest cost over the life of the loan.

• Fixed interest rates and payments - Most home equity loans have fixed interest rates, meaning your monthly payments remain consistent. This makes it easier to budget and provides financial stability.

• Lump sum payment - You get a lump sum upfront and can qualify for larger amounts compared to personal loans.

• Potential tax deduction - The interest paid on a home equity loan may be tax-deductible if the loan is used for home improvements.

Cons of home equity loans

• Risk of foreclosure - A home equity loan is secured by your property, so missing payments could result in foreclosure, causing you to lose your home. A change in circumstances also risks putting you in negative equity, where you owe more than your home's value.

• Adds long-term debt - A home equity loan adds an additional monthly payment to your obligations and increases overall debt.

• Diluted ownership - Borrowing against your home equity changes the amount of the home you own outright. You swap part of your stake for ready cash, lessening the share you own.