How To Repay a Home Equity Loan

How home equity loan repayment works

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A home equity loan is a lump-sum second mortgage that lets you borrow against your property’s equity. Like with any loan, you’ll need to repay the funds according to the terms of the loan.

Home equity loan repayments typically are fixed payments over a set period of time. Find out how home equity loan repayment works, how you can calculate your payments, and more about alternatives to making regular payments.

Key Takeaways

  • Home equity loan payments begin shortly after you close on the loan.
  • Payments typically continue for five to 30 years, depending on the loan term.
  • The amount of your monthly payment depends on the term, interest rate, and loan amount.
  • During repayment, you can refinance into another product, such as another home equity loan or a new mortgage.

What To Know About Home Equity Loan Repayment

After you close on your home equity loan, you can expect to start making payments within two months of closing, as you would with a first mortgage.

You should receive a statement from your lender every billing cycle, which is typically monthly and separate from your mortgage statement. This document includes your payment due date, payment amount, interest rate, balance details, and payment coupon. It may also include your escrow and property tax information.

How Do Payments Work?

You’ll need to submit your first payment by the due date, which is typically on the first day of the month. Part of your payment will go toward the loan’s principal, or original balance, while the remainder goes toward interest. These loans use simple interest rather than compounding interest. In addition, home equity loans are amortized, where more money goes toward interest than the principal during the early part of the loan term.

You could qualify for a tax deduction on home equity loan interest if you use the funds on qualified home-related costs.

If you fail to make your payment by the due date, your lender may offer a short grace period to pay the loan before you are subject to late fees. After 30 days, the lender can report the late payment to the three main credit bureaus, and your credit score could take a hit. After 120 days, the lender can usually start the process of foreclosing on your home.

How Do You Submit Payments?

You may set up automatic payments or manually make electronic payments through your lender’s portal. You’ll usually also have an option to pay by phone or visit a branch. If you’d prefer to pay by mail, you’ll send your payment coupon with a check or money order to your lender.

How Long Do You Have To Repay a Home Equity Loan?

Your specific loan term determines your repayment period, and it may be as short as five years or as long as 30 years. Your monthly payments continue until the loan balance reaches zero. Upon payoff, the loan no longer counts against your home’s equity.

If you fall behind and your lender agrees to modify your loan term, this could extend the repayment period. Making extra payments can shorten your repayment period.

How To Calculate Home Equity Loan Payments

You usually don’t need to calculate your home equity loan payment yourself. During the loan application process, you’ll get a loan estimate with the monthly payment amount that stays fixed throughout the term. You’ll also find your payment amount on your monthly statement and lender portal.

However, you can use a loan calculator to estimate your payment and simply plug in the numbers. You’ll need to know the loan amount, interest rate, and term. You also can do the calculation by hand using the following formula for simple interest amortized loans:

Monthly payment = {P x (r/n) x [(1 + r/n)^n(t)]} / {(1 + r/n)^n(t)] - 1}, where P stands for your original home equity loan principal, r stands for the annual interest rate, n stands for the annual number of payments, and t stands for the term in years.

Deciding How Much To Pay

To avoid default, make at least your minimum home equity loan payment on time. If you can’t make your payment, contact your lender about payment arrangements. Avoid skipping a payment or making a lower payment without providing notice.

Paying extra toward the principal can help reduce overall interest, build your home’s equity, and pay off your loan faster. But before you pay off your loan early, check with your lender to see if the loan has a prepayment penalty.

Alternatives to Home Equity Loan Repayment

If you want a lower payment, different term, or lower interest rate, consider some alternatives to paying back your home equity loan.

New Home Equity Loan

Refinancing involves getting a new home equity loan to pay off your current one. This could provide a chance to get a larger loan amount if you have enough equity to qualify, or to lock in a better interest rate than you currently get.

Refinancing usually comes with closing costs and requires that your combined loan-to-value ratio (including the existing home equity loan) isn’t too high to qualify.

Home Equity Line of Credit (HELOC)

A HELOC also allows you to tap your home equity, but it provides you with a revolving credit line with funds you can use for any purpose, including paying off your home equity loan.

A HELOC works to pay down your home equity loan if you have enough remaining equity to qualify. It offers the flexibility of an open credit line for a specific draw period. A HELOC typically has a variable interest rate, so your payment amount can change. It also carries the possibility that you will face a balloon payment, or larger payment, at the end of your loan.

Cash-Out Refinance

If you qualify for refinancing your original mortgage, you could get a cash-out refinance loan that allows you to take out a larger mortgage to access your equity. You can use that money to pay off the home equity loan and roll the amount into your mortgage.

With a cash-out refinance, you’d need to go through a lengthy application process with closing costs. And if your property loses value, you have a greater risk of being “underwater” on your loan.

0% Balance Transfer Offer

If your credit card issuer allows it, you could use a 0% balance transfer offer to move over all or a portion of your home equity loan balance and save on interest. This works best if you have a lower balance you can fully pay off before the promotional period ends.

It’s important that you have a plan for paying down the credit card before the introductory term ends. Otherwise, you’d likely end up paying a significantly higher rate for your credit card than your home equity loan, and you could go deeper into debt. You often have to pay a balance transfer fee for using balance transfers.

Frequently Asked Questions (FAQs)

What happens if you do not repay a home equity loan?

The lender will usually discuss options for getting your payments current and preventing foreclosure. For example, you might have access to a home equity loan assistance program.

Your lender can start the foreclosure process if you default on your payments. Your lender will usually notify you of your default within the first 45 days, and begin the foreclosure process after 120 days.

What are home equity loan rates?

Your home equity loan rate will depend on current market rates plus factors such as your credit score, income, loan term, loan-to-value ratio, and current property value. Some lenders offer lower rates if you agree to automatic bank withdrawals. Compare rates from several lenders to find the best deal. You can also pay down other debts to boost your credit score and lower your debt-to-income ratio to improve your rates.

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Article Sources

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

  2. Consumer Financial Protection Bureau. “Foreclosure Avoidance.”

  3. University of Hawaii. “4F Simple Interest Amortized Loans.”

  4. Federal Trade Commission. “Home Equity Loans and Home Equity Lines of Credit.”

  5. Consumer Financial Protection Bureau. “What You Should Know About Home Equity Lines of Credit.”

  6. Consumer Financial Protection Bureau. “How Do I Get and Keep a Good Credit Score?