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

The estimates provided by a home equity calculator can be leveraged to make smarter financial decisions. Consider how it might help you:

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 tells you 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.

Using the home equity payment calculator to model different loan terms — for example, comparing a 10-year repayment term to 20-year term — 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

Abstract financial concepts become much clearer with concrete examples. Here are two common situations where a homeowner might use a home equity loan to achieve their goals.

Scenario 1: Major Home Remodel

A homeowner wants to undertake a significant kitchen renovation and has budgeted $50,000 for the contractor, materials, and appliances. The homeowner uses the home equity loan calculator to determine that a $50,000, 15-year loan at 8.15% will yield a monthly payment of $482, which fits within the family’s budget. The home equity loan provides a necessary lump sum, which is helpful in covering upfront costs.

Scenario 2: Consolidating High-Interest Debt

A homeowner has accumulated debt across multiple credit cards, each with a high, variable interest rate. The unpredictable payments are both costly and hard to budget for. The home equity payment calculator shows that the homeowner can borrow $35,000, enough to pay off all the credit card debt, and at an interest rate of 8.50% the 10-year loan will have a steady monthly payment of $434. This is noticeably less than the most recent payments on the credit cards, so the homeowner moves forward and consolidates the debt into one loan.

Tips on Home Equity Loans

Successfully securing a home equity loan requires careful preparation and an awareness of what lenders look for in an applicant. Here’s some advice to guide you:

•  Build a strong credit score. Lenders view a strong credit score as a sign of financial responsibility. They typically favor credit scores of at least 680 or higher for home equity loan applicants, with many preferring 700 or more. Consistently paying bills on time and keeping credit card balances low can help improve your score.

•  Manage your debt-to-income ratio. Your debt-to-income (DTI) ratio is your total monthly debt payments divided by your gross monthly income. Lenders typically look for a DTI ratio below 50% for a home equity loan, and ideally below 36%.Paying down existing debt can help lower this ratio.

•  Understand the risks. If you fail to make payments, the lender has the right to foreclose on your property. It is important to be confident in your ability to repay the loan before proceeding.

•  Shop around. Interest rates, fees, and terms can vary significantly between lenders. Seek out 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. Use a home equity loan payment calculator to make sure you feel that you can manage the payment.

Recommended: Cash-Out Refinance vs. Home Equity Line of Credit

Alternatives to Home Equity Loans

There aren’t different types of home equity loans to choose from, just different interest rates and terms. But there are different ways to borrow against your equity. A home equity loan is only one of several ways to access funds using your property or personal credit. Understanding the full range of choices allows homeowners to select the financial product that best aligns with their needs.

Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) is a revolving line of credit secured by your home. Using it is similar to using a credit card. It has a “draw period,” during which you can access funds as needed up to a pre-approved limit, followed by a “repayment period.” During the interest only period, you can use a HELOC interest-only calculator to compute payment amounts. During the repayment phase, a HELOC repayment calculator is useful.

HELOCs typically have variable interest rates, meaning your payments can change over time. This makes a HELOC suitable for ongoing projects with uncertain timelines and costs, such as a phased home renovation.

Home Improvement Loan

A home improvement loan is a type of unsecured personal loan specifically intended for renovations. Because it is not secured by your home, it may come with a higher interest rate and a shorter repayment term compared to a home equity loan. This option may appeal to homeowners with limited equity or those who prefer not to use their home as collateral, despite the potentially higher borrowing cost.

Personal Line of Credit

A personal line of credit is another unsecured, revolving credit option. Like a HELOC, funds can be drawn as needed up to a set limit. However, since it is not backed by home equity, the interest rates and borrowing limits may be different from those of a home-secured product.

Cash-Out Refinance

A cash-out mortgage refinance replaces your existing mortgage with a new, larger one. The difference between the two loan amounts is given to you as a lump sum of cash. This action modifies the terms of your primary mortgage, including the interest rate and repayment schedule. A cash-out refinance is often considered when current mortgage rates are favorable enough to make replacing the entire primary loan advantageous.

The Takeaway

A Missouri home equity loan calculator is a helpful tool for any homeowner exploring how to harness the power of their home equity when borrowing money. Using it to explore different loan amounts, interest rates, and repayment terms can help you determine the best combination of these factors for your budget. Shopping around to find a lender that fits your needs is a natural next step.

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.