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Equity Loan Calculator: Understanding How It Works

By Oluchukwu Ikemefuna

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Some people consider owning a home one of the most significant investments an individual can make. Others have said buying a house is a huge step to financial freedom, but what do they mean when they say that? 

Photo by Kostiantyn Li on Unsplash

The value of the property increases over time, and if you ever decide to sell your home, you could be hitting a gold mine. But hold on; you do not need to sell your house before you can make some money off it.

Over time, as mortgage payments are made and property values appreciate, homeowners build equity in their homes. This equity can be a valuable resource, and you can leverage this equity through a home equity loan. 

In this article, we will look at how you can calculate equity loans. We will also consider what an equity loan means and how to apply for one. 

What is a Home Equity Loan?

An equity loan is also known as a home equity loan. You can think of it as a second mortgage. It is a loan that uses the value of your home as collateral. Some might even think of it as a secret stash of money hidden in your home because of how it works.

When you own a house and pay off your mortgage, the value of your home goes up. You start to own more and more of it. Equity is the part of the house that’s truly yours or that you own.

What a home equity loan does is allow you to borrow some of that equity. It’s like taking out a loan, but instead of getting the money from a bank, you’re getting it from the value of your own home.

But there are some rules. Most lenders want you to have at least 20% of your home paid off before they give you a home equity loan. So, if your house is worth $100,000 and you’ve paid off $20,000, you might be able to borrow some money.

However, when you pay back the money, you do so with added interest. Repayment can span between 5 and 20 years. 

Another good thing about home equity is that even if you’ve only owned your home for a short time, or if you made a small down payment, you might still be able to get a home equity loan. That’s because as property values go up, so does your equity.

So, even if you haven’t paid off much of your mortgage, you might still have some equity to borrow against.

Bear in mind that if you don’t pay it back, you could lose your house. So, make sure you understand all the terms and can afford the payments before you take the plunge.

Pros and Cons of Equity Loans

Home equity loans offer several advantages, including

Lower interest rates

Since these loans are secured by the home, they often come with lower interest rates compared to unsecured loans.

Fixed payments

With fixed interest rates and monthly payments, homeowners can budget more effectively, knowing exactly how much they owe each month.

Tax deductibility

In many cases, the interest paid on a home equity loan may be tax deductible, providing potential savings for homeowners.

However, there are also considerations to keep in mind:

Risk of foreclosure

Defaulting on a home equity loan can result in foreclosure, as the home serves as collateral for the loan.

Closing costs

Similar to a primary mortgage, home equity loans may entail closing costs and fees, which you should factor into the overall cost of borrowing.

Diluted ownership stake

By borrowing against home equity, homeowners reduce their ownership stake in the property, potentially impacting future proceeds from a sale.

How Does a Home Equity Loan Work?

The first step in applying for a home equity loan is figuring out how much equity the house has to offer. This is determined by deducting the current market value of the property from the amount of the outstanding mortgage.

Homeowners can normally borrow up to a predetermined amount from their equity—typically between 80% and 85%.Homeowners can apply for a home equity loan from several lenders once the amount of equity that can be borrowed has been determined.

To obtain the best conditions, it is advisable to shop around and compare rates and terms from several lenders.

Following approval, the homeowner receives the loan amount in one lump sum. You can apply this loan to several things, including major financial requirements like debt consolidation, house improvements, or educational costs.

After that, the loan is returned, plus any accumulated interest, in predetermined monthly installments for the duration of the agreement.

Applying for a Home Equity Loan

To make sure you are ready and can get the best conditions, applying for a home equity loan requires a few procedures. Here’s a short manual:

Check your credit score

Verify your credit score first. Generally speaking, approval from lenders requires a high credit score. Your credit report is available to you through several internet resources.

Calculate Your Equity

Calculate how much equity you own in your house. This is computed by deducting the current market value of your house from the amount of your outstanding mortgage.

Review your finances

Make sure you can afford the loan installments by taking a thorough look at your finances. Take into account elements like your income, spending, and outstanding debts.

Research Lenders

Compare home equity rates, minimal requirements, and expenses by investigating several lenders. Seek out lenders who provide the kind of home equity product you require, such as a home equity line of credit (HELOC) or loan.

Fill out an application form

Once you have selected a lender, complete the application. Personal information, including your name, address, Social Security number, and date of birth, must be provided.

Submit required documentation

The lender could ask for more paperwork after you submit your application. This frequently entails evidence of home insurance as well as income verification in the form of tax returns and pay stubs.

Review loan terms

Following the processing of your application, the lender will provide you with the loan conditions, which will include the interest rate and payback schedule. To make sure they satisfy your demands, carefully go over these words.

Approval and funding

The lender will complete the paperwork and provide you with the money if they accept your loan application. Generally, you can use these funds for anything you want, such as debt reduction, house upgrades, or other financial needs.

Understanding the Equity Loan Calculator

The equity loan calculator is an essential tool for anyone applying for a home equity loan. Based on their existing mortgage balance, home equity, and other variables, homeowners can use this tool to estimate how much they might be able to borrow.

Homeowners can rapidly determine their ability to borrow money and their future monthly payments by entering pertinent data into the calculator, such as property worth and current loan amounts.

A useful tool for calculating loan eligibility and interest rates is the loan-to-value ratio (LTV), which can be found using most equity loan calculators.

More favorable loan terms, such as lower interest rates and bigger borrowing limits, are frequently the outcome of a lower LTV ratio.

What are the requirements to qualify for a home equity loan?

Depending on the lender and the loan terms, different requirements apply for home equity loans. However, typically, borrowers have to fulfill the following conditions and possess:

  • Own a minimum of 20% of the residence, while some lenders only permit 15% ownership. 
  • a ratio of debt to income of no more than 43% 
  • Eighty percent or less of the loan-to-value ratio; a credit score in the mid-600s or above 
  • Evidence of consistent income

Determining Your Home Equity Loan Amount

The amount you can borrow for a home equity loan is determined by many factors. These include the value of your property and the remaining balance on your mortgage. Let’s consider others here:

Typical limits

Lenders often let you borrow between 80% and 85% of the value of your house after deducting your mortgage balance. This means that, depending on the lender’s regulations, you could be able to borrow more. This can be between $97,500 and $122,500 if your home is worth $350,000 and your mortgage is for $200,000.

Some lenders offer more

Lenders may occasionally let you borrow more than the customary maximums—up to 100% of the value of your house. That being said, this is less typical and might have more stringent conditions.

Calculating your maximum borrowing amount

Multiply the value of your house by the percentage you are permitted to borrow to determine the total amount you can borrow.

For instance, if your home is worth $350,000, you can borrow up to 85% of its value. If you multiply $350,000 by 85%, you get $297,500.

Subtract the remaining money from your mortgage next. $297,500 less $200,000, or $97,500, is your mortgage balance if it is $200,000. Therefore, in this case, a home equity loan might allow you to borrow up to $97,500.

Calculating Your Home Equity

The current worth of your house and the amount still owed on your mortgage are the two essential figures in calculating your home equity. This is a straightforward process.

Gather your numbers

First and foremost, you must ascertain your home’s fair market value. Usually, this is based on comparable sales in your region or recent appraisals.

Second, find out how much of your mortgage still needs to be repaid. Usually, your most recent mortgage statement has this information.

Do the calculation

Deduct the outstanding amount on your mortgage from the present-day worth of your house. This computation will determine your home equity.

For illustration purposes, suppose your house is currently worth $410,000 and you have a $220,000 mortgage balance.

$410,000 is the home’s value. $190,000 (home equity) minus $220,000 (mortgage balance)

Understanding the Result

In this case, the equity in your house is $190,000. This indicates that you own 46% of the entire value of your house.

 This is essentially the part of your house that you own outright, free and clear of any mortgage debt.


For homeowners wishing to tap the equity in their house for a variety of uses, a home equity loan can be a useful financial instrument.

Homeowners can decide if a home equity loan is a good fit for their financial situation and aspirations by learning how these loans operate, using equity loan calculators, and carefully weighing the benefits and drawbacks.

To guarantee the greatest results, as with any financial product, it is crucial to carry out an in-depth study and consult financial experts.


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Peremoboere Numa
Peremoboere Numa

Pere is a versatile SEO writer with a Master's degree in English, who is dedicated to creating engaging and impactful content.

She excels in weaving content that not only informs, enlightens and impacts but but also optimize its online presence to rank on major web sites.

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