How to Use the Home Equity Loan Calculator Data to Your Advantage

The output from a home equity loan calculator provides more than just numbers; it is a strategic planning resource. This data allows homeowners to assess affordability, compare different loan structures, and align their borrowing decisions with their financial goals.

By analyzing the Estimated Monthly Payment provided by the home equity loan payment calculator, you can determine how a new loan payment would fit into your existing budget. This is a critical step to prevent overextending yourself.

The Maximum Loan Amount gives you the lowdown on how to get equity out of your home and how much equity you might harness. This estimate will be useful if you are planning large-scale projects, such as a major renovation.

Finally, using the calculator to model different loan terms — for example, comparing a 10-year repayment term to 20-year one — illustrates the fundamental trade-off between lower monthly payments and higher total interest costs. Modeling different rates and terms in the calculator is an important step in your decisionmaking process.

Home Equity Loan Scenarios

Here are two scenarios that illustrate the practical applications of a home equity loan:

Scenario 1: Funding Home Renovations

Imagine a homeowner planning a complete kitchen remodel. They have obtained quotes and know the project will cost $40,000. A home equity loan is a good financing solution because it provides the full amount in a single lump sum, allowing them to pay the contractor and purchase materials without delay. The fixed monthly payments shown by the home equity loan payment calculator make it easy to budget for the repayment over a set term.

Scenario 2: Consolidating High-Interest Debt

Consider a homeowner with multiple high-interest debts, such as credit card balances and a personal loan, totaling $25,000. By taking out a home equity loan, they can pay off all these debts at once. This consolidates their multiple monthly payments into a single, predictable payment, often at a significantly lower interest rate, which can save them money and simplify their finances.

Tips on Home Equity Loans

Securing favorable terms on a home equity loan and using it wisely requires more than just having equity in your home. Take these smart steps as well:

•  Build a strong credit history. Lenders view a strong credit score as an indicator of financial responsibility. Lenders typically favor credit scores of at least 680 or higher for home equity loan applicants, with many preferring 700 or more.

•  Manage your debt-to-income ratio. Your debt-to-income (DTI) ratio, which is your total monthly debt payments divided by your gross monthly income, is a key metric for lenders. Lenders typically look for a DTI ratio below 50% for a home equity loan, and ideally below 36%. Reducing existing debts before applying for a home equity loan can lower your DTI and make you a more attractive borrower.

•  Understand the risks. Only borrow if you are confident in your ability to repay the loan. Missing payments could result in foreclosure.

•  Shop around. Interest rates, fees, and terms can vary significantly between lenders.Get offers from multiple financial institutions to compare your options.

•  Borrow only what you need. You might qualify for a large loan amount, and it can be tempting to borrow more than necessary. To avoid taking on extra debt, limit your loan to the amount required for your specific purpose.

Alternatives to Home Equity Loans

While a home equity loan is an attractive financial tool, it is not the only option available to homeowners who need access to funds. Although there aren’t different types of home equity loans, there are alternative ways to borrow based on home equity, as well as loans that don’t involve using your home as collateral.

Recommended: HELOC vs. Home Equity Loan

Home Equity Line of Credit (HELOC)

A HELOC is a revolving line of credit secured by your home. In practice, it’s much like a credit card. Borrowers can draw funds as needed up to a predetermined limit during a “draw period,” which typically lasts for several years. During this time, they need only pay interest on the borrowed amount (a HELOC interest-only calculator is useful).

After the draw comes the repayment phase, when borrowers pay both interest and principal. There’s a HELOC repayment calculator for that. Interest rates on HELOCs are usually variable so monthly payments aren’t entirely predictable. While a home equity loan typically allows borrowing up to 85% of your equity, a HELOC may allow up to 90%. HELOCs are ideal for times when you don’t entirely know how much you will need to borrow, or when a large project might require you to borrow in phases versus all at one time.

Home Improvement Loan

A home improvement loan is a type of unsecured personal loan specifically intended for renovation projects. Because it is unsecured, your home is not used as collateral, eliminating the risk of foreclosure. While funding can be faster, interest rates may be higher, and loan amounts are often smaller compared to a home equity loan.

Personal Line of Credit

Similar to a HELOC, a personal line of credit is a revolving line of credit. But this credit line is not secured by your home. Funds can be drawn as needed up to a set limit. Interest rates may be higher than those for a HELOC or home equity loan because there is no collateral for the credit line.

Cash-Out Refinance

A cash-out mortgage refinance replaces your existing primary mortgage with a new, larger one, and the difference is paid to you as a lump sum of cash. This option is often limited to borrowing up to 80% of your home equity. Unlike a home equity loan, which adds a second monthly payment, a cash-out refinance results in only one mortgage payment.

When you consider a cash-out refinance vs. a home equity line of credit or home equity loan, an important consideration will be current mortgage interest rates. If they are higher than the rate you have with your current home loan, a home equity loan or HELOC might be a better borrowing option.

The Takeaway

For Illinois homeowners, a home equity payment calculator is a useful tool when you want to estimate your borrowing capacity and understand what potential monthly payments might be. Doing research with the calculator can help you approach the lending process with a clearer understanding of what to expect. It is also important to compare offers from different lenders before committing to a specific loan — in the long run, doing so will be well worth a small investment of your time.

SoFi now offers home equity loans. Access up to 85%, or $750,000, of your home’s equity. Enjoy lower interest rates than most other types of loans. Cover big purchases, fund home renovations, or consolidate high-interest debt. You can complete an application in minutes.

Unlock your home’s value with a home equity loan from SoFi.

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FAQ

How is a home equity loan different from a home equity line of credit (HELOC)?

A home equity loan provides a one-time lump sum of cash that is repaid with monthly payments at a fixed interest rate. In contrast, a HELOC is a revolving line of credit with a typically variable interest rate. You can borrow and repay funds as needed during a set draw period, usually 10 years. With a home equity loan, you begin making payments on the interest and principal at once. HELOCs typically allow you to pay only interest during the draw phase.

How much can I borrow with a home equity loan?

The amount you can borrow is based on your home’s value, existing mortgage balance, income, and credit. Lenders typically limit borrowing up to 85% of your equity.

Is the interest rate on a home equity loan fixed or variable?

Home equity loans almost always come with a fixed interest rate. This means the rate shown by the home equity payment calculator will not change over the life of the loan, resulting in predictable and consistent monthly payments. A home equity line of credit, on the other hand, typically has a variable rate.

Are there closing costs or fees with home equity loans?

Yes, home equity loans typically have closing costs, which often amount to 2% to 5% of the total loan amount. These costs can include fees for appraisal, title search, and loan origination. Some lenders may offer no-closing-cost options, which might come with a slightly higher interest rate.