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

Once you have the output from a home equity loan calculator, there are several ways you can use the information.

Set Realistic Expectations

The home equity loan payment calculator will show you your maximum loan amount based on your equity. This can help you set realistic expectations when thinking about a big renovation, for example, and when requesting quotes from lenders. It’s a good idea to get multiple rate quotes to find the one that saves you the most money, whether on interest, fees, or both.

Double-Check Your Budget

The estimated monthly payment figure shown by the home equity payment calculator allows you to assess whether you can meet a new debt obligation within your monthly budget *before* committing to a loan. Does the calculator’s estimated monthly payment fit within your existing financial obligations? If so, proceed.

Try Out Different Scenarios

Maybe the monthly payment amount feels a bit scary. You can use the calculator here as well. By adjusting variables like the loan amount or loan term, you can try to find a balance between the amount you want to borrow and the amount you can afford to pay.

Home Equity Loan Scenarios

Here are two examples of how a home equity loan decision might play out for someone using the home equity calculator.

Scenario 1: Home Renovation

A homeowner wants to undertake a complete kitchen remodel with a fixed cost of $50,000. Using a home equity loan calculator, they explore different repayment terms. They find that a 10-year term at 8.00% interest results in a monthly payment of about $607, while a 20-year term lowers the payment to approximately $418. The homeowner decides that the renovation is financially manageable with the longer loan term, even if it does mean higher interest costs.

Scenario 2: Debt Consolidation

Another homeowner is managing multiple high-interest credit card debts totaling $25,000. The combined monthly payments are high and are mostly servicing interest. By entering their information into a calculator, they discover that a home equity loan could consolidate these debts into a single loan. With a 10-year term (and an 8.00% rate), their new monthly payment could be around $303. This single, lower-interest payment simplifies their finances and allows them to pay down the principal balance more effectively than they could with their credit cards.

Tips on Home Equity Loans

Securing a home equity loan is a big financial decision and these practical strategies can help homeowners borrow wisely.

•  Shop around: It is advisable to compare offers from multiple lenders. Even small differences in interest rates and fees can lead to substantial cost variations over the life of the loan.

•  Take good care of your credit: You’ll need a credit score of 680 to get the loan, but if you can pay your bills on time and not max out all your lines of credit, you could eventually get above 700. For many lenders, that’s a sweet spot for lower interest rates.

•  Pin down your project needs: Home equity loans are well-suited for projects with a known, fixed cost, such as replacing a roof, covering the costs of a wedding, or paying down debt. Try to understand the full cost of your project and take out a loan for that amount. Better yet if your project adds value to your home.

•  Understand the risk: We’ve said it before but it bears repeating. Your home is used as collateral to secure the loan. This means that a failure to repay the loan according to the agreed-upon terms can lead to foreclosure.

Recommended: HELOC vs. Home Equity Loan

Alternatives to Home Equity Loans

A traditional home equity loan is not the only option for accessing a home’s value. You can even access cash with a mortgage refinance. Learn about that and other options here:

Home Equity Line of Credit (HELOC)

A HELOC is a revolving line of credit secured by the home. Unlike a home equity loan that provides a one-time lump sum, HELOCs allow a borrower to draw funds as needed up to a preapproved limit during a specified “draw period.” It typically has a variable interest rate, and payments are made only on the amount borrowed. Even better, lenders typically only require you pay interest during the draw period. A HELOC interest-only calculator can show you what those payments might look like.

After the draw period ends, the loan enters a “repayment period” where the outstanding principal and interest must be paid back and a HELOC repayment calculator comes in handy. HELOCs are especially useful for borrowers who don’t need all the funds at one time, or who aren’t sure exactly how much they need to borrow.

Home Improvement Loan

A home improvement loan is a type of unsecured personal loan, meaning it does not use the home as collateral. This is the primary distinction from a home equity loan. Because the loan is unsecured, it may have a higher interest rate, a lower borrowing ceiling, or a shorter repayment term.

Personal Line of Credit

A personal line of credit is an unsecured, revolving line of credit. As with a home improvement loan, it is not secured by the home. This feature differentiates it from both a home equity loan and a HELOC, as it poses no direct risk to the borrower’s property in case of default. But again, the interest rate on a personal credit line might be higher than that on a home equity loan.

Cash-Out Refinance

A cash-out refinance is a process that replaces an existing mortgage with a new, larger loan. The homeowner receives the difference between the new and old loan amounts in cash. There are important differences in a cash-out refinance vs. a home equity line of credit or home equity loan. Unlike a home equity loan or HELOC, which are both second mortgages, a cash-out refinance results in a single, new primary mortgage that consolidates the old mortgage and the new cash amount. A refinance makes the most sense if you can obtain a lower interest rate on the refi than you have on your current mortgage.

The Takeaway

Using a South Dakota home equity payment calculator is a smart first step for homeowners interested in borrowing against the equity built up in their home. It can estimate your borrowing power and help you understand potential repayment obligations. The core nature of a home equity loan—a fixed-rate, lump-sum loan secured by one’s property—makes it a predictable financial commitment, which is attractive to many borrowers. Before pursuing a home equity loan, explore interest rates with multiple lenders.

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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. Repayment starts immediately, and the borrower pays a consistent monthly payment thanks to 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. You can even borrow and only pay interest during that time. After the draw phase ends, you’ll be required to make monthly payments for the duration of the term. These payments can be somewhat unpredictable because the interest rates on HELOCs change with market conditions.

How much can I borrow with a home equity loan?

The borrowing amount depends on your available equity and your creditworthiness. Generally speaking, lenders typically limit borrowing to 85% of equity.

What can I use home equity loan money for?

Funds from a home equity loan can be used for nearly any purpose. Common applications include home renovations, consolidating higher-interest debts such as credit-card debt, or covering other large, one-time purchases.

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

Home equity loans typically come with a fixed interest rate. This means the rate remains the same for the entire loan term, which results in predictable and consistent monthly payments.