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Home Equity Loan Calculator Nerdwallet

Home Equity Loan Payment Formula:

\[ PMT = P \times \frac{r \times (1 + r)^n}{(1 + r)^n - 1} \]

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1. What is a Home Equity Loan?

A home equity loan allows homeowners to borrow against the equity in their home. These loans typically have fixed interest rates and set repayment terms, making monthly payments predictable.

2. How Does the Calculator Work?

The calculator uses the standard loan payment formula:

\[ PMT = P \times \frac{r \times (1 + r)^n}{(1 + r)^n - 1} \]

Where:

Explanation: This formula accounts for both principal and interest payments over the life of the loan.

3. Understanding Loan Payments

Details: Each payment includes both interest charges and principal repayment. Early in the loan, most of your payment goes toward interest; later, more goes toward principal.

4. Using the Calculator

Tips: Enter the loan amount, annual interest rate (APR), and loan term in years. The calculator will show your estimated monthly payment, total repayment amount, and total interest paid.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between home equity loan and HELOC?
A: Home equity loans provide a lump sum with fixed payments, while HELOCs (Home Equity Lines of Credit) work like credit cards with variable rates.

Q2: How much can I borrow with a home equity loan?
A: Typically up to 80-85% of your home's value minus what you owe on your mortgage.

Q3: Are home equity loan payments tax deductible?
A: Interest may be deductible if used for home improvements (consult a tax professional).

Q4: What credit score do I need?
A: Most lenders require a score of 620 or higher, with better rates for scores above 700.

Q5: How does this compare to refinancing?
A: Home equity loans keep your first mortgage intact while refinancing replaces it with a new loan.

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