How Payments Are Calculated for Home Equity Loans

What goes into monthly home equity loan payments?

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Home equity loans enable you to borrow money from your home’s equity, using your house as collateral. Your home’s equity is its market value minus the amount of your mortgage balance. For example, if your home has a market value of $200,000 and you still owe $50,000 on the mortgage, as a homeowner, you have $150,000 in equity.

Typically, home equity loans feature fixed interest rates with monthly payments. But like mortgage loans, home equity loans are subject to closing costs and maintenance fees, which can drive up the cost of obtaining one. Calculating the total cost of home equity loan payments depends on the amount of money you borrow, the loan’s interest rate, and the length of the loan term.

Key Takeaways

  • Home equity loans are subject to closing costs and maintenance fees.
  • Most home equity loans feature fixed interest rates.
  • Amortization of home equity loans enables you to make equal monthly payments during the life of the loan.
  • Lenders offer numerous ways to repay a home equity loan, but some charge a prepayment penalty if you pay off the loan early.

Monthly Payment Costs for Home Equity Loans

Like mortgages, home equity loans require you to repay the principal plus interest, along with closing costs, which can include:

  • An application fee
  • Attorneys fees
  • A property appraisal
  • Credit report fee
  • Maintenance fees
  • Mortgage filing fee
  • Notary fee
  • Points to reduce your interest rate
  • Property insurance
  • Property taxes
  • Title insurance
  • Title search fee

Typically, closing costs for home equity loans run 2% to 6% of the loan amount. For instance, if you borrow $100,000, you can expect to pay $2,000 to $5,000 more in closing costs. Reputable lenders disclose all costs upfront.

Closing fees can vary by lender, so it’s important to shop around. Some lenders advertise low or no closing costs but may charge higher interest rates in return.

Some lenders allow borrowers to roll closing costs into the loan balance, enabling the borrower to avoid a large upfront payment at closing.

How To Calculate Home Equity Loan Payments

Lenders calculate home equity loan payments by creating an amortization schedule, based on the loan amount, interest rate, and loan term. Usually, amortized loans feature equal payments throughout the life of the loan. Most home equity loans require monthly payments.

For instance, if you take out a loan for $10,000 with a fixed interest rate of 4% and a five-year term, you will pay about $184 per month for 60 months. At the beginning of the loan, a high percentage of your monthly payments will cover interest. But over time, more of your payments will apply to the loan’s principal.

Only principal payments build your home’s equity.

For example, in the $10,000 hypothetical loan scenario, your first $184 payment would pay $33 in interest and $151 toward the principal. But the 60th and final $184 payment would apply entirely to the principal, with no interest payment. With a fully amortized loan, the lender calculates interest for each monthly payment, based on the remaining balance, so the interest you pay decreases as your balance decreases.

Many lenders provide a home equity loan calculator on their websites, enabling you to see how much you’ll have to pay each month, and how much of each payment pays down principal and interest over the life of the loan. You can also access The Balance’s mortgage calculator, which produces amortization schedules for fixed- and adjustable-rate loans.

How To Pay Off a Home Equity Loan

Home equity loan payment options vary by lender, but may include:

  • Automatic payment through a checking account
  • In-person payment
  • Online payment
  • Payment by mail
  • Payment over the phone

Some lenders offer interest-rate discounts when you sign up for automatic payments.

Statements and Coupons

Federal law allows creditors and loan servicers to provide borrowers with electronic statements, but only with the consumer’s consent. Some lenders send monthly statements through the mail, with remittance coupons attached. Others provide coupon books that include payment vouchers for several months.

Prepayment Penalties

If your financial situation changes and you have extra cash, you may decide to make extra payments to pay off your home equity loan early. However, some home equity loan contracts contain a prepayment penalty clause, which requires you to pay an additional fee for paying off the debt early. Typically, prepayment penalties only apply during the first three to five years of the loan, and often do not apply to extra principal payments.

Frequently Asked Questions (FAQs)

How many days past the payment due date do I have before I face a late-payment penalty?

Many home equity loan lenders offer grace periods of five to 15 days. However, if you pay past the grace period, the creditor or servicer will likely charge a late fee. Signing up for automatic payments is a good way to avoid paying late fees and developing potential credit problems.

Why does so much of my monthly home equity payment go to interest costs?

Amortization of fixed-rate loans enables you to pay equal payments over the life of the loan. In the beginning, a large portion of each payment pays the loan’s interest. But with each monthly payment, the amount of money applied to interest decreases and the amount applied to the loan’s principal increases.

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Article Sources

  1. Consumer Financial Protection Bureau. “What Is a Home Equity Loan?

  2. Rocket Mortgage. “Closing Costs: What Are They, and How Much Will You Pay?

  3. Legal Information Institute. “Amortization.”

  4. Consumer Financial Protection Bureau. “How Does Paying Down a Mortgage Work?

  5. California State Board of Equalization. “Time Value of Money—Six Functions of a Dollar.”

  6. Consumer Financial Protection Bureau. “Comment for 1026.41—Periodic Statements for Residential Mortgage Loans.”

  7. Consumer Financial Protection Bureau. “What Is a Prepayment Penalty?

  8. Educational Systems Federal Credit Union. “Home Equity Loans.”