Home equity loans allow you to borrow money against the equity in your home, using your home as collateral. Your home equity is the market value minus the amount you owe on your mortgage. For example, if your home is worth $200,000 and you still owe $50,000 on the mortgage, as the homeowner, you have $150,000 in equity.
Monthly Payment Costs for Home Equity Loans
Like mortgages, home equity loans require you to pay back the principal plus interest, along with closing costs, which can include:
- Application fees
- Attorney fees
- Property appraisal
- Credit report fees
- Maintenance fees
- Mortgage recording fees
- Notary fees
- Points to reduce the interest rate
- Property insurance
- Property taxes
- Title insurance
- Title search fees
Typically, closing costs for home equity loans range from 2% to 6% of the loan amount. For example, if you borrow $100,000, you might expect to pay an additional $2,000 to $5,000 in closing costs. Reputable lenders disclose all costs upfront.
Closing fees can vary from lender to lender, so it’s important to shop around. Some lenders may advertise low or no closing costs but may charge higher interest rates in return.
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. Typically, amortized loans feature equal payments throughout the loan term. Most home equity loans require monthly payments.
With a fully amortized loan, the lender calculates the interest for each monthly payment based on the remaining balance, so the interest you pay decreases as your balance decreases.
For example, if you borrow $10,000 at a fixed interest rate of 4% for five years, you will pay $184.17 monthly for 60 months. In the beginning of the loan, a larger portion of your monthly payments will cover interest. But in the 60th and final payment, the majority of the payment will apply to principal.
The table below shows a five-year loan at various intervals with the amounts applied to interest and principal.
| Month | Monthly Payment | Principal | Interest |
|---|---|---|---|
| 1 | $184.17 | $150.84 | $33.33 |
| 12 | $184.17 | $156.46 | $27.71 |
| 24 | $184.17 | $162.83 | $21.34 |
| 36 | $184.17 | $169.47 | $14.70 |
| 48 | $184.17 | $176.37 | $7.80 |
| 60 | $184.17 | $183.56 | $0.61 |
Many lenders offer a home equity loan calculator on their websites, allowing you to see how much you will have to pay each month and how much of each payment goes toward principal and interest over the life of the loan. You can also access a mortgage calculator at The Balance, which produces amortization schedules for fixed and adjustable-rate loans.
Note: Your home equity is built only through principal payments.
How to Repay a Home Equity Loan
Repayment options for home equity loans vary from lender to lender but may include:
- Automatic payment from a checking account
- In-person payment
- Online payment
- Mail-in payment
- Payment by phone
Note: Some lenders offer interest rate discounts for enrolling in automatic payments.
Statements and Coupons
Federal regulations allow creditors and loan services to provide borrowers with electronic statements, but only with consumer consent. Some lenders send monthly statements by mail with payment coupons attached. Others provide coupon books that include payment slips for several months.
Prepayment Penalties
If your financial situation changes and you have extra cash, you may decide to make additional payments to pay off your home equity loan early. However, some home equity loan agreements may contain a prepayment penalty clause, requiring you to pay an additional fee to pay off the loan early.
Typically,
Prepayment penalties apply only during the first three to five years of the loan, and often do not apply to additional principal payments.
Frequently Asked Questions (FAQs)
How long after the due date can I wait before a late payment penalty is imposed?
Many home equity loan lenders offer grace periods ranging from five to 15 days. However, if you pay after the grace period, the creditor or servicer is likely to impose a late fee. Enrolling in automatic payments is a good way to avoid late fees and develop potential credit problems.
Why does so much of my monthly payment on a home equity loan go toward interest costs?
Fixed-rate loans allow you to pay equal installments over the loan term. Initially, a large part of each monthly payment goes toward interest on the loan. But with each monthly payment, the amount paid toward interest decreases while the amount paid toward principal increases.
Would you like to read more content like this? Subscribe to The Balance’s newsletter for daily insights, analysis, and financial tips, delivered directly to your inbox every morning.
Was this page helpful?
Thank you for your feedback! Let us know why! Other
Sources:
- Consumer Financial Protection Bureau. “What Is a Home Equity Loan?”
- Rocket Mortgage. “Closing Costs: What Are They, and How Much Will You Pay?”
- Legal Information Institute. “Amortization.”
- California State Board of Equalization. “Time Value of Money—Six Functions of a Dollar.”
- Consumer Financial Protection Bureau. “How Does Paying Down a Mortgage Work?”
- Consumer Financial Protection Bureau. “Comment for 1026.41—Periodic Statements for Residential Mortgage Loans.”
- Consumer Financial Protection Bureau. “What Is a Prepayment Penalty?”
- Educational Systems Federal Credit Union. “Home Equity Loans.”
Source: https://www.thebalancemoney.com/how-payments-are-calculated-for-home-equity-loans-5324957
Leave a Reply