Home Equity Loan Calculator | Bankrate (2024)

A home equity loan is a type of loan that uses your home as collateral to secure the debt. There are two types of home equity loans: home equity loans and home equity lines of credit (HELOCs).

Home equity loans are similar to personal loans in that the lender issues you a lump-sum payment and you repay the loan in fixed monthly installments. A HELOC operates similar to a credit card in that you borrow money on an as-needed basis. HELOCs come with draw periods that normally last 10 years. During this period, you can use money from the credit line, and you’re only responsible for making interest payments.

Both options require you to have a certain amount of home equity; this is the portion of the home you actually own. Lenders typically require that you have between 15 percent and 20 percent equity in your home in order to take out a home equity loan or line of credit.

One drawback is that home equity loans and lines of credit have closing costs and fees similar to a standard mortgage. Closing costs vary, but can run into the thousands of dollars based on the value of a property.

To calculate your home’s equity, divide your current mortgage balance by your home’s market value. For example, if your current balance is $100,000 and your home’s market value is $400,000, you have 25 percent equity in the home.

You can get an idea of your home’s equity easily using the above calculator. Simply input your address, home value (here are ways to estimate it) and what you still owe on your mortgage. Then choose your credit score to see how much you might be able to borrow via a home equity loan.

Building home equity is the first step to obtaining a home equity loan. It’s a lot easier to build equity if you made a larger down payment on the home initially, because you already have a sizable stake in the property.

Another way to build equity is to increase your home’s value by renovating it. (Keep in mind certain home improvement projects have a stronger return on investment than others.) In addition, you can build equity faster by making extra payments towards your mortgage principal, such as biweekly payments or one additional payment a year.

Debt consolidation and home improvements are the most common reasons homeowners borrow from their equity, says Greg McBride, CFA, chief financial analyst for Bankrate. There are other reasons borrowers might tap home equity, as well, such as education costs, vacations or other big-ticket purchases.

Borrowers can deduct the interest paid on HELOCs and home equity loans if they use the funds to buy, build or improve the home that serves as collateral for the loan.

Using a home equity loan can be a good choice if you can afford to pay it back. However, if you can’t afford to repay the loan, you risk the lender foreclosing on your home. This can ruin your credit, making it hard to qualify for other loans in the future.

Home equity loans give you a lump sum upfront, and you’ll repay the loan in fixed installments. The loan term can vary from five years to 30 years. Having a fixed amount could make impulse spending less likely, and make it easier to budget for your monthly payments. However, you can’t take out a higher amount to cover an emergency unless you obtain an additional loan, and you would have to refinance to take advantage of a lower interest rate.

In contrast, a HELOC is a revolving line of credit that taps your home equity up to a preset limit. HELOC payments aren’t fixed, and the interest rate is variable. You can draw as much as you need, up to the limit, during the draw period, which can last as long as 10 years. You’ll still make payments during the draw period, which are typically interest-only. After this period, you’ll repay both interest and principal over the loan’s remaining term.

Both HELOCs and home equity loans involve putting your home on the line as collateral, so they tend to offer better interest rates than unsecured debt such as a personal loan or credit card.