Typically, home equity loans feature fixed interest rates with monthly payments. But like mortgage loans, home equity loans are subject to closing costs and maintenance fees, which can drive up the cost of obtaining one. Calculating the total cost of home equity loan payments depends on the amount of money you borrow, the loan’s interest rate, and the length of the loan term.
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 feeAttorney feesA property appraisalCredit report feeMaintenance feesMortgage filing feeNotary feePoints to reduce your interest rateProperty insuranceProperty taxesTitle insuranceTitle 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.
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.
How to Pay off a Home Equity Loan
Home equity loan payment options vary by lender, but may include:
Automatic payment through a checking accountIn-person paymentOnline paymentPayment by mailPayment over the phone
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.
