Mortgage questions
How do you calculate a home equity loan?
You calculate a home equity loan in two steps: first work out how much of your home you actually own (your equity), then see how much of that a lender will let you borrow against. Your monthly payment then comes from that loan amount, the interest rate and the term. The catch is that the lender's number, not yours, is the one that counts, so it helps to know how they get there before you apply.
Start with the equity you actually own
Equity is simply what your home is worth minus what you still owe on it. If your home would sell for a round figure and your mortgage balance is a portion of that, the difference is your equity. That is the pool a home equity loan draws from. Lenders rarely let you borrow all of it. They cap how much of the home's value can be tied up in loans altogether, which is called your combined loan-to-value, or all the loans on the house added up as a share of what it's worth. A common ceiling is most of the value, though it varies by lender and by your credit. Say the cap is four-fifths of the home's worth: on a home valued at a given amount, the most total debt secured by the house would be four-fifths of that figure. Subtract what you already owe and the remainder is the most a home equity loan could be. That subtraction is the whole calculation. The variables are the appraised value, your existing balance and the cap the lender applies.
The appraisal is where the math gets decided
Your own estimate of value does not set the loan amount; the lender's appraisal does. A lower appraisal shrinks every number downstream, because the cap is a percentage of value. If the same home appraises lower than you expected, the cap applies to the smaller figure, and with your existing balance subtracted the loan amount drops with it. This is why a home equity loan is not a reliable way to raise a specific round number. Ask the lender early how they value the home, whether a full appraisal is required, and what happens if it comes in low. Some lenders use an automated valuation for smaller loans, which is faster but still their call.
Your payment comes from three inputs
Once you know the loan amount, the monthly payment depends on the interest rate and the term, the number of years you have to repay. A home equity loan is usually a fixed-rate loan: the rate stays the same for the life of the loan, so the payment does too. That is the main difference from a home equity line of credit, which is variable in most plans and works as a draw period followed by a repayment period. A longer term lowers the monthly payment but raises the total interest you pay. A shorter term does the reverse. Run both before you decide, because the difference over a decade or two is larger than most people expect. One more cost to plan for: closing costs. Home equity loans often carry application, appraisal and recording fees, and those are separate from the loan amount itself.
Where to look on the paperwork
You will see the loan amount, interest rate, monthly payment and total closing costs on page one of your Loan Estimate, the standard three-page form every lender must give you shortly after you apply. Page two breaks out the closing costs line by line. Compare that page across lenders, not just the rate, because fees can differ more than rates do. Before closing you get a Closing Disclosure, which should match the Loan Estimate closely. If a fee in the lender's own origination charges went up without a documented reason, that is worth questioning.
How to check a quote without doing the math alone
You do not have to accept the first cap or rate you are offered. Ask each lender two questions: what combined loan-to-value ceiling are you applying to my file, and what rate and term does that produce? Those two answers let you compare offers on the same footing. Ralo is a mortgage broker, which means it arranges the loan with a lender rather than lending the money itself. It is paid a thin commission that is fixed in advance per lender and cannot vary with your rate or terms, so the quote you get is not steered by what pays the broker more. That is one option; a bank or credit union you already use is another, and comparing a few is how you find out whether a quote is competitive. You can also check any company's license for free in the public NMLS lookup.
Figures used on this page
| Figure | Value | Source |
|---|---|---|
| Home equity loan rate | Fixed for the life of the loan | CFPB, What is a home equity loan? |
| HELOC rate | Variable in most plans, set as an index plus a margin | CFPB, What is a home equity line of credit? |
| HELOC structure | A draw period, followed by a repayment period | CFPB, home equity line of credit brochure |
| Broker compensation structure | fixed in advance per lender; cannot vary with your rate or terms | CFPB loan originator compensation rule (Regulation Z) |
| What a mortgage broker does | Arranges the loan with a lender; does not lend the money itself | CFPB, What is a mortgage broker? |
| Verifying any mortgage company’s license | free public lookup on NMLS Consumer Access | NMLS Consumer Access |
Ralo is an automated mortgage broker — not a lender — that compares multiple lenders from one application, earns a thin commission, and shows rate, APR, and fees upfront. Rates shown anywhere on this site are illustrative examples, not a loan approval, rate lock, or commitment. Available where licensed: California, Colorado, and Texas.