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

The data generated by a home equity loan calculator is more than just a set of numbers; it is a powerful tool for financial planning, budgeting, and decision-making.

The estimated monthly payment helps you evaluate affordability. You can insert this figure into your household budget to see if it fits. You can add this estimated payment to your other monthly debt obligations (mortgage, auto loans, student loan) and divide by your gross monthly income. This gives you a projection of your new debt-to-income (DTI) ratio. A solid DTI ratio from a lender’s perspective is below 50%.

The maximum loan amount estimate helps you understand the upper limit of your borrowing capacity. For homeowners planning large-scale projects, this figure can help you determine a project budget with a contractor before starting negotiations. You don’t need to spend up to the max, but if your kitchen renovation will cost more than your maximum, you might need to rethink the project.

Finally, the calculator lets you compare loan offers you may have from lenders, or formulate your ideal mix of loan amount, loan term, and interest rate. A longer term will lower the payment but increase the total interest paid. You can model different approaches and find the optimal balance between securing the funds you need and managing your payments.

Seeing these numbers in hypothetical scenarios can make the implications of each choice much clearer.

Home Equity Loan Scenarios

Applying the concept of a home equity loan to common, real-world situations can clarify its practical benefits and costs.

Scenario 1: Home Renovation

A homeowner wants to undertake a kitchen remodel with a clear, upfront cost of $40,000. A home equity loan is well-suited for this purpose because it provides a single lump sum, allowing the homeowner to pay the contractor and purchase new appliances without delay. A home equity payment calculator shows that the monthly payment on the loan, based on a fixed interest rate of 8.50%, would be $496 at a term of 10 years. The homeowner feels a little pinched by that monthly payment amount, so tests a term of 20 years using the calculator. The payment of $347 feels about right.

Scenario 2: Debt Consolidation

A common strategy is to use a lower-interest, fixed-rate home equity loan to pay off multiple higher-interest debts like credit cards. This approach can simplify your finances by combining multiple payments into one predictable monthly bill. For instance, consolidating $20,000 in credit card debt with an average 22.00% APR into a home equity loan at a 9.00% APR could reduce your monthly interest accrual and potentially save you thousands of dollars over time.

Tips on Home Equity Loans

While a home equity loan can be a powerful financial resource, responsible borrowing requires some know-how. Follow these guidelines:

•  Understand the risks. The failure to make payments on your home equity loan on time can have severe consequences, including the risk of foreclosure.

•  Maintain a strong credit history. Lenders view a consistent history of timely payments as a sign of financial responsibility. You’ll need a minimum 680 score, and 700 or better may lead to more favorable interest rates, which can save you money over the life of the loan.

•  Minimize existing debt. Your debt-to-income (DTI) ratio compares your monthly debt payments to your income. While lenders may accept a DTI up to 50%, and ideally below 36%, makes an applicant more attractive and more likely to secure favorable rates.

•  Borrow just what you need. It can be tempting to borrow the maximum amount available, but it’s wiser to align the loan amount with a specific need. Avoid taking on unnecessary debt by carefully calculating the funds required for your project or goal.

•  Compare offers from several lenders. Interest rates, fees, and loan terms can differ significantly between lenders. Shopping around and comparing offers from several financial institutions can help you find the most competitive deal and save money.

Recommended: What Is a Home Equity Line of Credit?

Alternatives to Home Equity Loans

When people talk about different types of home equity loans, they are really talking about different ways to borrow against your equity — and there are a couple of other options to consider. There are also ways to borrow that don’t involve putting your home up as collateral. These are alternatives to a home equity loan:

Home Equity Line of Credit (HELOC)

A HELOC is a revolving line of credit secured by your home. It functions much like a credit card, in that you borrow money as you need it versus accepting a lump sum. A HELOC has a two-phase structure: an initial “draw period” (often 10 years) during which you can borrow funds as needed up to a set limit, followed by a “repayment period” (often 20 years) where you pay back the principal and interest. Unlike a home equity loan, HELOCs typically have variable interest rates, meaning your payments can fluctuate. This option is ideal for ongoing projects with uncertain costs, such as a phased home renovation, or for homeowners who want a flexible emergency fund to draw upon only when necessary.

To get a sense of what payments might look like, you can experiment with a HELOC interest-only calculator (for the draw phase) and a HELOC repayment calculator (for repayment).

Home Improvement Loan

A home improvement loan is an unsecured loan, meaning your home is not used as collateral. Because the loan is unsecured, the risk to the lender is higher, which often results in higher interest rates and shorter repayment terms compared to a home equity loan. However, the application and funding process is typically much faster, and it eliminates the risk of foreclosure. This makes it a suitable choice for smaller home projects, for new homeowners who have not yet built up significant equity, or for those who feel uneasy putting their property on the line.

Personal Line of Credit

A personal line of credit is another unsecured, revolving credit option. Similar to a HELOC, it allows you to draw funds as needed up to a predetermined limit and only pay interest on the amount you borrow. The primary difference is that it is not secured by your home. This distinction generally leads to higher interest rates and lower credit limits compared to a HELOC. It can be a viable option for individuals who require borrowing flexibility but either lack sufficient home equity or prefer not to use their home as collateral.

Cash-Out Refinance

A cash-out mortgage refinance involves replacing your current mortgage with a new, larger one and receiving the difference in cash. The new mortgage will have its own interest rate and term. A cash-out refinance can be advantageous if you can secure a lower interest rate than you have on your original home loan while simultaneously accessing cash.

As you explore a cash-out refinance vs. home equity line of credit, consider that a refinance leaves you with one monthly loan payment instead of a second payment on top of your first mortgage.

The Takeaway

Using a New Hampshire home equity loan payment calculator will let you explore borrowing against your home equity quickly and help you determine what size loan, what interest rate, and what loan term might be the best fit for your financial situation. If you’re feeling ready to capitalize on your home equity, it’s a good idea to explore a few lenders as they all have slightly different qualification criteria and you’ll likely get different interest rate offers.

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.

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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 single lump sum of money at a fixed interest rate, leading to predictable monthly payments. A HELOC is a revolving line of credit with a variable interest rate, allowing you to borrow funds as needed up to a set limit. The home equity loan is an installment loan, while the HELOC functions more like a credit card secured by your home.

How much can I borrow with a home equity loan?

The amount you can borrow depends on your current home value, outstanding mortgage balance, credit score, debts, and income. Lenders typically allow you to borrow up to 85% of your home equity. Subtract your mortgage balance from your current home value and multiply by 85% to determine the maximum potential loan amount.

What can I use home equity loan money for?

The funds from a home equity loan can be used for pretty much any purpose. Common uses include major home improvements, consolidating high-interest debt from credit cards or other loans, or covering significant one-time costs like medical bills or a wedding. There are generally no restrictions on how the money can be spent.

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 interest rate remains the same for the entire duration of the loan. As a result, the monthly payments are predictable and do not change, making it easier for homeowners to budget for the repayment over the loan’s term.