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

The outputs from a home equity calculator can be used to compare loan offers, budget for the future, and negotiate with lenders.

By analyzing the Estimated Monthly Payment provided by the home equity loan payment calculator, you can determine how a proposed loan payment would fit into your existing budget. This will help keep you from overextending yourself.

The Maximum Loan Amount tells you how much equity you might harness. This estimate will be useful if you are planning big projects, such as a 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. For instance, a $100,000 loan at 8.00% has a monthly payment of $836 on a 20-year term, versus $1,213 on a 10-year term.

Home Equity Loan Scenarios

To better understand the real-world implications of borrowing with a home equity loan, it is helpful to visualize how different variables affect loan payments. Take a look at these possible scenarios:

Financing a Major Home Improvement Project

For a project with a known, fixed cost, such as a kitchen overhaul or a roof replacement, a home equity loan is a smart choice. You would receive the full loan upfront so you can pay the contractor and purchase new appliances. Then you’ll pay off your new room over a fixed time period with predictable monthly payments.

Consolidating High-Interest Debt

A common strategy is to use a lower-interest, fixed-rate home equity loan to pay off multiple higher-interest credit card debts. You’ll have one predictable monthly payment instead of multiple payments with interest rates that seem to change constantly. For instance, consolidating $20,000 in credit card debt with an average 21.00% APR into a home equity loan at a 9.00% rate could significantly reduce how much interest you pay on your way to being free of debt.

Covering Major Life Expenses

A home equity loan can also be used to cover significant, one-time costs, such as funding a wedding. Compared to other financing options like unsecured personal loans, a secured home equity loan typically offers a lower interest rate, ensuring you can enjoy the party without fretting about the bill.

Recommended: What Is a Home Equity Line of Credit?

Tips on Home Equity Loans

Approaching a home equity loan requires careful planning. These tips can help you navigate the process responsibly and secure the most favorable terms.

•  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, will be scrutinized. 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 ratio.

•  Understand the risks. Only borrow if you are sure you can repay the loan. You don’t want to risk foreclosure.

•  Shop around. Seek out offers from multiple financial institutions and use the home equity loan payment calculator to compare the costs of their interest rates. Don’t forget to look at fees as well.

•  Borrow only what you need. Once you learn your borrowing power, it can be tempting to borrow more than necessary. Avoid taking on extra debt. One sobering thought: If your home’s market value declines, you could end up owing more than the property is worth, a situation known as being “underwater.”

Recommended: HELOC Repayment Calculator

Alternatives to Home Equity Loans

While there aren’t different types of home equity loans to consider, there are different ways to borrow against your equity, as well as borrowing methods that don’t require you to use your home as collateral. Here are your options:

Home Equity Line of Credit (HELOC)

A HELOC is a revolving line of credit secured by your home. In contrast to a home equity loan’s lump-sum disbursement, a HELOC allows you to draw funds as needed during a specified “draw period” which is often 10 years. HELOCs typically feature a variable interest rate and may offer interest-only payment options during the draw period. (You can use a HELOC interest-only calculator to see what payments might look like during this time.)

After the draw phase is the repayment period, when you’ll pay both principal and interest. As you think about a HELOC vs. a home equity loan, you may opt for a HELOC if you aren’t exactly sure of the amount you need to borrow, or if you prefer to keep monthly payments low at first and delay paying down the principal.

Home Improvement Loan

A home improvement loan is an unsecured personal loan specifically marketed for funding renovations. Because it does not use your home as collateral, the application process is often faster, but this typically results in higher interest rates and lower loan amounts compared to a home equity loan.

Personal Line of Credit

A personal line of credit is a flexible, unsecured borrowing option. Similar to a HELOC, it allows you to borrow funds as needed up to a predetermined limit. Since it is not secured by your home, the risk of foreclosure is eliminated, but interest rates are generally higher and are heavily dependent on your creditworthiness.

Cash-Out Refinance

A cash-out mortgage refinance replaces your current mortgage with a new, larger one, allowing you to receive the difference between the two loan amounts in cash. As you think about a cash-out refinance vs. a home equity line of credit, one important difference is that a refi leaves you with only one monthly payment. A refinance can be an attractive option if you can secure a lower interest rate than you have on your primary mortgage, but remember to factor in closing costs when you consider the expense involved in refinancing.

The Takeaway

A home equity loan calculator can help Maine homeowners explore how to best leverage their equity. Spend just a few minutes with the tool, and you’ll come away with a sense of your borrowing power and an understanding of your potential monthly payments. Securing the best loan terms hinges on a strong financial profile, particularly a good credit score and a healthy debt-to-income ratio. Shopping around and getting rate estimates from multiple lenders can help you find the right lending partner for your goals.

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, repaid with a fixed interest rate and predictable monthly payments. In contrast, a HELOC is a revolving line of credit with a variable interest rate. With a HELOC, you borrow funds as needed up to a set limit during a draw period and pay interest only on the amount used.

What can I use home equity loan money for?

Funds from a home equity loan can be used for a wide range of purposes. Common uses include home renovations, consolidating high-interest debt, paying for weddings, or covering medical bills. It’s important to think about how you will repay what you borrow if you elect to use your home as collateral when borrowing, regardless of how you’re using the cash.

What are the typical loan terms for a home equity loan?

The repayment period, or term, for a home equity loan ranges from five to 30 years. Borrowers can choose a term within this range. A shorter term will have higher monthly payments but less total interest paid, while a longer term offers lower monthly payments but more interest paid over the life of the loan.

Are there closing costs or fees with home equity loans?

Home equity loans have closing costs that can range from 2% to 5% of the total loan amount. These fees may include charges for an appraisal, credit report, title search, and loan origination. Loan options with no closing costs often come with higher interest rates.