How to Calculate a Home Equity Loan Payment — Step by Step

The seven steps at a glance

A home equity loan payment is the loan divided by the months, priced by the rate. The seven steps are: work out the equity, work out the maximum you can borrow, pick the loan amount, work out the monthly rate, count the payments, work out the monthly payment, and work out the total paid and the interest. The worked example comes to $492.37 a month for a $50,000 loan, or $88,626.56 in all.

Step 1 — Work out the equity

Subtract the mortgage balance from the home value: that is the equity, the part of the home you own outright. For the worked example, the home is worth $450,000 and the mortgage balance is $280,000, so the equity is $450,000 minus $280,000, which is $170,000.00. The equity is the starting point, because a lender will only let you borrow against the part you own, and the equity is what the home would leave you if you sold it and paid the mortgage off in full.

Step 2 — Work out the maximum you can borrow

Multiply the home value by the LTV cap, then subtract the mortgage balance: that is the maximum you can borrow. Most lenders cap home equity loans at 80% of the home value, which leaves a 20% cushion for the lender if the value falls. For the worked example, 80% of $450,000 is $360,000, and $360,000 minus the $280,000 mortgage is $80,000.00. That is the most the lender will lend, even though the equity is $170,000.00: you cannot borrow the full equity, because the lender will not lend past its cap. If the mortgage balance is bigger than the LTV cap times the home value, the maximum is $0.00, and there is nothing to borrow against.

Step 3 — Pick the loan amount

Pick how much to borrow, inside the maximum. For the worked example, the loan is $50,000, which is inside the $80,000.00 maximum, with $30,000.00 of headroom. Borrow only what the job needs: every extra dollar borrowed is a dollar of interest over the term, and the payment scales with the loan, so an $80,000 loan costs $787.79 a month against $492.37 for $50,000. If the loan you want is above the maximum, the calculator says so, and you either borrow less or wait for the mortgage balance to fall.

Step 4 — Work out the monthly rate

Divide the annual rate by 12: that is the monthly rate. For the worked example, the annual rate is 8.5%, so the monthly rate is 8.5% divided by 12, which is 0.708333% a month, or 0.00708333 as a decimal. The monthly rate is the number the loan formula actually uses, because the loan is paid monthly, and a rate quoted a year is twelve monthly rates added up. A rate 1.5 points lower, at 7.0%, is a monthly rate of 0.583333%, and a rate 1.5 points higher, at 10.0%, is 0.833333% a month.

Step 5 — Count the payments

Multiply the years by 12: that is the number of payments. For the worked example, the term is 15 years, so the payments are 15 times 12, which is 180 payments, one a month for 15 years. A 10-year term is 120 payments, and a 30-year term is 360 payments. The number of payments is the exponent in the loan formula, and it is what makes a longer term cheaper a month and dearer in all.

Step 6 — Work out the monthly payment

Work out the payment with the loan formula: the payment is the loan times the monthly rate times (1 plus the monthly rate) to the power of the payments, divided by (1 plus the monthly rate) to the power of the payments minus 1. For the worked example, the loan is $50,000, the monthly rate is 0.00708333, and the payments are 180, so the payment is $50,000 times 0.00708333 times (1.00708333) to the power of 180, divided by (1.00708333) to the power of 180 minus 1, which is $492.37 a month. The home equity loan calculator runs the same formula for any loan you enter.

Step 7 — Work out the total paid and the interest

Multiply the payment by the number of payments: that is the total paid. For the worked example, $492.37 times 180 is $88,626.56. Then subtract the loan: that is the interest. $88,626.56 minus $50,000 is $38,626.56 of interest over 15 years. The interest is the price of borrowing: the loan costs $38,626.56 more than the $50,000 you receive. A shorter term cuts the interest, because the loan is paid off sooner, and a lower rate cuts it too: at 7.0% the interest is $30,894.54, and at 10.0% it is $46,714.46.

The worked example, line by line

Setup: home $450,000, mortgage $280,000, LTV 80%, loan $50,000, rate 8.5%, term 15 years. Line 1, the equity: $450,000 minus $280,000 is $170,000.00. Line 2, the maximum: 80% times $450,000 minus $280,000 is $80,000.00. Line 3, the monthly rate: 8.5% divided by 12 is 0.708333%. Line 4, the payments: 15 times 12 is 180. Line 5, the monthly payment: $492.37. Line 6, the total paid: $492.37 times 180 is $88,626.56. Line 7, the interest: $88,626.56 minus $50,000 is $38,626.56. Every figure here comes from the same seven steps, and the home equity loan calculator runs them for any home you enter.

Other loans, checked

An $80,000 loan, the maximum: $787.79 a month, $141,802.50 in all, $61,802.50 of interest. A $25,000 loan: $246.18 a month, $44,313.28 in all, $19,313.28 of interest. At 7.0%: $449.41 a month, $80,894.54 in all, $30,894.54 of interest. At 10.0%: $537.30 a month, $96,714.46 in all, $46,714.46 of interest. A 10-year term: $619.93 a month, $74,391.41 in all, $24,391.41 of interest. A 30-year term: $384.46 a month, $138,404.43 in all, $88,404.43 of interest. A $600,000 home: equity $320,000.00, maximum $200,000.00, payment $492.37, unchanged. A $350,000 mortgage: equity $100,000.00, maximum $10,000.00, payment $492.37, unchanged, and the $50,000 loan would be above the $10,000.00 maximum, so it could not be borrowed. Worked backwards: $300 a month affords $30,464.91, $400 a month affords $40,619.88, $600 a month affords $60,929.82, and $800 a month affords $81,239.75, which is above the $80,000.00 maximum.

What the seven steps leave out

The seven steps count the home, the mortgage, the LTV cap, the loan, the rate and the term, and they leave out the extras: the property taxes, the homeowner’s insurance, the closing costs and any fees are priced separately, and the seven steps assume a fixed rate for the whole term. The seven steps assume the home value is as entered: check it against recent sales or an appraisal, because a $50,000 error in the value moves the maximum by $40,000 at 80% LTV. The seven steps do not say whether a lender will approve you: the lender checks your credit, your income and the home’s value before it lends. For the mortgage itself, see the 15-year vs 30-year mortgage calculator, and for the payment schedule, see the amortization schedule calculator.