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One of the biggest perks of homeownership is the ability to build equity over time. You can use that equity to secure low-cost funds in the form of a second mortgage—either as a home equity loan or a home equity line of credit (HELOC). With a home equity loan, you can borrow a lump sum, using the equity you’ve built up in your house as collateral. Then, just like a regular mortgage, you pay this money back as a fixed monthly payment.
This payment depends on three main factors: how much you borrow, how long you borrow it for, and the interest rate. In this article, we’ll show you how these elements affect your monthly payment, give some typical values, and explore some of the additional costs of home equity loans.
Key takeaways
- A home equity loan uses home equity—the difference between your home’s value and your mortgage balance—as collateral.
- You receive the loan as a lump sum and repay it in equal monthly payments.
- Monthly payments for home equity loans depend on the amount borrowed, the length of time to pay it back, and the interest rate.
- Borrowing $500,000 over 30 years at a low interest rate will mean much lower monthly payments than borrowing the same amount over just five years at a high interest rate.
- Make sure to factor in the other costs associated with home equity loans when you calculate the cost of your loan.
Understanding Home Equity Loan Payments
The monthly payments for home equity loans depend on three main factors: how much you borrow, the length of time that you have to pay it back, and the interest rate you are offered. All these factors can have a large impact on the amount you owe each month. Let’s look at how they interact.
Loan Amount
The more you borrow, the more you’ll have to pay back per month. But you can’t borrow all the equity you’ve built up in your home, because banks underwrite second mortgages much like other home loans. Each bank has guidelines that dictate how much they can lend based on the value of your property and your creditworthiness. This is expressed in a measure known as the combined loan-to-value (CLTV) ratio. A bank may typically be able to lend you 80% of the value of your home, less the money you still owe on your first mortgage.
Because of this, you have to have a lot of equity in your home and your home has to be worth quite a lot of money in order to borrow $500,000. This would be a large home equity loan, in other words. You could borrow $500,000 if, for example, your home is worth $750,000 and you have $100,000 left on your mortgage (because $750,000 x 0.80 = $600,000 – $100,000 = $500,000).
Loan Term
The term of a loan is the number of years it will take to pay it off. For a given amount and interest rate, a longer term will have lower monthly payments, but will charge more total interest over the life of the loan. Typically, the term of an equity loan term can be anywhere from five to 30 years, but the length of the term must be approved by the lender.
Interest Rate
The interest on the loan also affects your monthly payments. And in turn, the interest rate you are offered depends on a wide variety of factors. Usually, a longer loan term has a higher interest rate. Like other mortgages, your eligibility for a loan and interest rate depends on your employment history, income, and credit score. The higher your score, the lower the risk you pose of defaulting on your loan, and the lower your rate.
As home equity loans are secured against your home, banks typically offer extremely competitive interest rates for these types of loan—usually close to those of first mortgages. Compared with unsecured borrowing sources, such as credit cards, you’ll be paying less in financing fees for the same loan amount.
Home Equity Loan Payment Examples
By taking into account all three of these factors, it’s possible to calculate indicative monthly payments for a $500,000 home equity loan. Here are the basic monthly repayments for a $500,000 loan at different interest rates, and at different term lengths:
| Indicative monthly repayments for a $500,000 home equity loan | |||||
|---|---|---|---|---|---|
| Interest Rate | |||||
| Loan Term | 3% | 4% | 5% | 6% | 7% |
| 5 years | $8,984.00 | $9,208.00 | $9,436.00 | $9,666.00 | $9,901.00 |
| 10 years | $4,828.00 | $5,062.00 | $5,303.00 | $5,551.00 | $5,805.00 |
| 15 years | $3,453.00 | $3,698.00 | $3,954.00 | $4,219.00 | $4,494.00 |
| 20 years | $2,773.00 | $3,030.00 | $3,300.00 | $3,582.00 | $3,876.00 |
| 30 years | $2,108.00 | $2,387.00 | $2,684.00 | $2,998.00 | $3,327.00 |
Other Costs
These basic monthly repayments aren’t the only costs associated with home equity loans, though. When you take out a home equity loan, you’ll likely have to pay many of the same closing costs associated with a first mortgage, such as loan-processing fees, origination fees, appraisal fees, and recording fees.
In addition, lenders may require you to pay “points”—that is, prepaid interest—at closing time. Each point is equal to 1% of the loan value. So on a $100,000 loan, one point would cost you $1,000. Points lower your monthly interest rate, which might actually help you in the long run, but if you’re thinking about paying the loan off early this kind of upfront interest doesn’t work in your favor.
These are all one-off payments, and won’t affect your standard monthly loan repayments. However, they can add thousands of dollars to the cost of a home equity loan, so it’s important to be aware of them.
Make sure you take into account both the interest rate and loan term when calculating the cost of a home equity loan. A longer term will lower your monthly payments, but you’ll pay more in interest over the lifetime of the loan.
How Are Home Equity Loan Payments Calculated?
The monthly payments for home equity loans depend on three main factors: how much you borrow, the length of time that you have to pay it back, and the interest rate you are offered.
What Is the Interest Rate on a Home Equity Loan?
It varies, but as home equity loans are secured against your home, banks typically offer extremely competitive interest rates for these types of loan—usually close to those of first mortgages.
How Much Home Equity Can I Borrow?
Each bank has guidelines that dictate how much they can lend based on the value of your property and your creditworthiness. This is expressed in a measure known as the combined loan-to-value (CLTV) ratio. A bank may typically be able to lend you 80% of the value of your home, less the money you still owe on your first mortgage. You have to have a lot of equity in your home, and your home has to be worth quite a lot of money, in order to borrow $500,000.
The Bottom Line
A home equity loan uses the equity in your home—that is, the difference between your home’s value and your mortgage balance—as collateral. You will receive your loan as a lump sum, and then pay this back in equal monthly payments.
The monthly payments for home equity loans depend on three main factors: how much you borrow, the length of time that you have to pay it back, and the interest rate you are offered. Borrowing $500,000 over 30 years at a low interest rate will mean much lower monthly payments than borrowing the same amount over just five years at a high interest rate. At 5% interest over 15 years, you should expect to pay around $4,000 per month.
There are other costs associated with home equity loans, so make sure you take these into account as well when you are calculating the cost of your loan.
