How Payments Are Calculated for Home Equity Loans

What goes into monthly home equity loan payments?

By Michael Evans

Updated on July 30, 2022

Reviewed by Doretha Clemon

Fact checked by

Jane Meacham

Key Takeaways

Home equity loans are subject to closing costs and maintenance fees.
Most home equity loans feature fixed interest rates.
Amortization of home equity loans enables you to make equal monthly payments during the life of the loan.
Lenders offer numerous ways to repay a home equity loan, but some charge a prepayment penalty if you pay off the loan early.

Monthly Payment Costs for Home Equity Loans

Like mortgages, home equity loans require you to repay the principal plus interest, along with closing costs, which can include:

An application fee
Attorney fees
A property appraisal
Credit report fee
Maintenance fees
Mortgage filing fee
Notary fee
Points to reduce your interest rate
Property insurance
Property taxes
Title insurance
Title search fee

Typically, closing costs for home equity loans run 2% to 6% of the loan amount. For instance, if you borrow $100,000, you can expect to pay $2,000 to $5,000 more in closing costs. Reputable lenders disclose all costs upfront.

Closing fees can vary by lender, so it’s important to shop around. Some lenders advertise low or no closing costs but may charge higher interest rates in return.

Note

Some lenders allow borrowers to roll closing costs into the loan balance, enabling the borrower to avoid a large upfront payment at closing.

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. Usually, amortized loans feature equal payments throughout the life of the loan. Most home equity loans require monthly payments.

With a fully amortized loan, the lender calculates interest for each monthly payment based on the remaining balance, so the interest you pay decreases as your balance decreases.

For example, if you take out a loan for $10,000 with a fixed interest rate of 4% and a five-year term, you will pay $184.17 per month for 60 months. At the beginning of the loan, a larger portion of your monthly payments will cover interest. But the 60th and final payment, the vast majority of the payment would apply to the principal.

The table below shows the five-year loan at various intervals with the amounts applied towards interest and principal.

Loan Amortization Schedule
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 provide a home equity loan calculator on their websites, enabling you to see how much you’ll have to pay each month and how much of each payment pays down principal and interest over the life of the loan. You can also access The Balance’s mortgage calculator, which produces amortization schedules for fixed- and adjustable-rate loans.

Note

Only principal payments build your home’s equity.

How to Pay off a Home Equity Loan

Home equity loan payment options vary by lender, but may include:

Automatic payment through a checking account
In-person payment
Online payment
Payment by mail
Payment over the phone

Note

Some lenders offer interest-rate discounts when you sign up for automatic payments.

Statements and Coupons

Federal law allows creditors and loan servicers to provide borrowers with electronic statements, but only with the consumer’s consent. Some lenders send monthly statements through the mail, with remittance coupons attached. Others provide coupon books that include payment vouchers for several months.

Prepayment Penalties

If your financial situation changes and you have extra cash, you may decide to make extra payments to pay off your home equity loan early. However, some home equity loan contracts contain a prepayment penalty clause, which requires you to pay an additional fee for paying off the debt early.

Typically, prepayment penalties only apply during the first three to five years of the loan, and often do not apply to extra principal payments.

Frequently Asked Questions (FAQs)

How many days past the payment due date do I have before I face a late-payment penalty?

Many home equity loan lenders offer grace periods of five to 15 days. However, if you pay past the grace period, the creditor or servicer will likely charge a late fee. Signing up for automatic payments is a good way to avoid paying late fees and developing potential credit problems.

Why does so much of my monthly home equity payment go to interest costs?

Amortization of fixed-rate loans enables you to pay equal payments over the life of the loan. In the beginning, a large portion of each payment pays the loan’s interest. But with each monthly payment, the amount of money applied to interest decreases and the amount applied to the loan’s principal increases.

Note

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Sources

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

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.”