How Home Equity Loan Payments Are Calculated
A home equity loan is usually a fixed-rate installment loan secured by the equity in your home. You receive a lump sum and repay it with equal monthly payments over a set term. The Home Equity Loan Calculator uses standard amortization formulas to compute the monthly payment and then decomposes each payment into interest and principal over time.
Behind the scenes, the calculator converts your annual percentage rate into a monthly rate and your term in years into a number of monthly payments. It then applies the classic loan payment formula used for many mortgages and installment loans.
Monthly Payment Formula For A Home Equity Loan
Let P be the loan amount, r be the monthly interest rate as a decimal and n be the total number of monthly payments. The fixed monthly payment M that fully pays off the loan over n months when r is greater than zero is:
The calculator finds the monthly interest rate by dividing the annual percentage rate by 12 and by 100 to convert from percent to decimal:
The total number of payments n is the term in years multiplied by 12:
When the interest rate is exactly zero, there is no cost of borrowing and the payment formula reduces to a simple division:
Interest And Principal In Each Payment
Each monthly payment has two parts: interest and principal. The interest portion for a month with current balance B is:
The principal portion is the rest of the payment after interest is covered:
After the payment is applied, the new outstanding balance becomes:
At the beginning of the loan, the balance B is large, so the interest portion is larger and the principal portion is smaller. As the balance falls, interest charges shrink and more of each payment goes toward principal. This pattern is typical for amortizing loans and is clearly visible in the amortization table generated by the calculator.
Total Interest And Total Amount Paid
Over the full term of the loan, you make n equal payments of M. The total amount you pay is:
Since the original loan amount is P, the total interest you pay to the lender over the life of the loan is:
The Home Equity Loan Calculator reports both totals so that you can see how much borrowing costs in absolute terms, not just as a percentage rate.
Amortization Schedule Logic
The amortization schedule in the calculator is built month by month using the same formulas. The steps for each payment are:
- Start with the current balance B.
- Compute interest as B × r.
- Compute principal as M − interest.
- If principal exceeds the remaining balance in the final month, cap principal at the remaining balance and adjust the last payment downward.
- Subtract principal from the balance to get the new balance.
These steps repeat until the balance reaches zero. For each payment, the table displays the payment number, the full payment amount, the interest portion, the principal portion and the remaining balance after the payment. This makes it easy to see how quickly you are building equity by paying down the loan.
How To Use The Home Equity Loan Calculator
- Enter the loan amount you plan to borrow or the amount you already owe on a home equity loan.
- Enter the annual interest rate as a percentage, such as 7.5 for 7.5%.
- Enter the term of the loan in years, for example 10, 15 or 20 years.
- Optionally adjust the number of decimal places used in the results.
- Click the calculate button to see the monthly payment, totals and amortization schedule.
Interpreting The Results
The results grid summarizes the key figures:
- Monthly payment: the fixed amount you would pay every month for the full term.
- Total interest paid: the total cost of borrowing over the life of the loan.
- Total amount paid: the sum of all payments, including both principal and interest.
- Number of payments: the total count of monthly payments required to pay off the loan.
- Effective term: the term expressed in years and months for easy interpretation.
- Monthly interest rate: the decimal rate applied to the balance each month.
The amortization table beneath the summary lets you review any specific payment, including how much of it is going to interest versus reducing the outstanding balance.
Planning Tips For Using Home Equity Responsibly
- Compare the monthly payment to your budget to ensure you can comfortably afford it.
- Pay attention to total interest paid over the life of the loan, not just the monthly payment amount.
- Experiment with shorter terms to see how much interest you could save in exchange for a higher monthly payment.
- Remember that home equity loans are secured by your property, so missed payments can have serious consequences.
Home Equity Loan FAQs
Frequently Asked Questions About Home Equity Loans
Understand how fixed-rate home equity loans work, how payments are calculated and what the results from this calculator mean.
For a typical fixed-rate home equity loan, the monthly payment remains the same for the entire term. Only the mix of interest and principal changes over time, with interest decreasing and principal increasing in each payment.
Interest is calculated on the outstanding balance, which is highest at the beginning of the loan. As you pay down principal, the balance shrinks and interest charges get smaller, allowing more of each later payment to go toward principal reduction.
You can pay off a home equity loan faster by choosing a shorter term when you borrow or by making extra payments toward principal. Using a shorter term increases the monthly payment but reduces total interest paid over the life of the loan.