Equity Loan Types and How They Work

Equity loans let a homeowner borrow against the value built up in a property, but the term covers several different products: chiefly home equity loans, home equity lines of credit (HELOCs), and cash-out refinances. This calculator estimates the fixed monthly payment and total interest for a fully amortizing, fixed-rate loan; enter the amount, APR, and term to see the estimate.

Formula

This calculator uses the standard level-payment formula for a fixed-rate loan with monthly payments:

Payment = P × r ÷ [1 − (1 + r)⁻ⁿ]

• P is the amount borrowed, in dollars.
• r is the monthly interest rate, calculated as APR ÷ 1,200.
• n is the number of monthly payments, calculated as loan term in years × 12.

Total interest is the rounded monthly payment multiplied by the number of payments, minus the original loan amount. The calculator displays the monthly payment to cents; its total-interest result uses that rounded payment.

Worked Example

Using the calculator’s defaults—$20,000 borrowed, 8% APR, and a five-year term:

1. Convert the APR to a monthly rate: 8 ÷ 1,200 = 0.0066667.
2. Convert the term to payments: 5 × 12 = 60 months.
3. Substitute into the formula: $20,000 × 0.0066667 ÷ [1 − (1 + 0.0066667)⁻⁶⁰].
4. The unrounded payment is about $405.53, so the displayed monthly payment is $405.53.
5. Total interest using the displayed payment is $405.53 × 60 − $20,000 = $4,331.80.

Assumptions

• The interest rate stays fixed for the full term.
• Payments are made monthly at the end of each payment period.
• Interest compounds monthly at APR divided by 12.
• The calculation excludes fees, taxes, insurance, mortgage insurance, escrow, and other charges.

Main Types of Equity Loans

Home equity is the difference between a property’s market value and the debt secured by it. For example, if a home is valued at $400,000 and the mortgage balance is $250,000, the arithmetic difference is $150,000. That is not necessarily the amount a lender will allow someone to borrow: valuation methods, existing liens, underwriting, and product terms affect the available credit.

• Home equity loan: A lump sum is advanced, usually with a set repayment schedule and fixed interest rate. It is commonly described as a second mortgage when a first mortgage remains in place. The calculator above models this kind of fixed-rate, fully amortizing payment.
• HELOC: A revolving credit line secured by home equity. The borrower draws funds as needed, up to the available limit, and may repay and borrow again subject to the agreement. Rates are often variable, and payment rules can change between draw and repayment periods. A single fixed-payment estimate does not capture those features.
• Cash-out refinance: An existing mortgage is replaced with a new, larger mortgage, and some proceeds are paid out to the borrower. This is different from adding a separate home equity loan: the new mortgage replaces the old one, and its term, rate, costs, and balance determine the payment.

Some lenders also offer specialized arrangements, such as shared-equity agreements, but these are not conventional loans with a standard monthly-payment formula. The contract may exchange a share of future home value for money today. Read the actual agreement carefully; this calculator does not model those arrangements.

How the Products Differ

The central distinction is how money is accessed and repaid. A home equity loan provides a defined lump sum. A HELOC provides access to a credit limit that can be drawn over time. A cash-out refinance changes the primary mortgage itself. These structures can produce different payment patterns, total borrowing costs, and consequences if payments are missed.

For example, a homeowner planning one known expense might compare a lump-sum structure with a credit line that allows staged withdrawals. Someone considering replacing an existing mortgage would need to compare the full new mortgage—not merely the cash received—with the current loan and any separate borrowing option. No single calculator captures every cost or contract detail.

Costs, Risks, and Common Misunderstandings

Because these products are secured by a home, failure to meet the contract’s payment obligations can put the property at risk. Equity is not the same as cash on hand, and borrowing against it increases debt. A home’s market value can also change, so an estimate based on today’s value is not a guarantee of future value or borrowing capacity.

• “Equity” does not equal an approved loan amount. The simple value-minus-debt calculation is only a starting point. A lender determines actual terms and availability.
• A low initial payment may not show the full cost. HELOC rates can vary, and some agreements have payment stages. Check the contract’s rate-adjustment and repayment terms.
• Compare all relevant charges. Application, valuation, closing, annual, or other fees may apply depending on the product and agreement. Obtain the actual figures rather than assuming the calculator includes them.
• Do not confuse payment with total cost. A longer term can reduce the scheduled monthly payment while increasing interest over time, all else equal.
• Consider what happens if circumstances change. Repayment obligations remain even if income, expenses, or property value changes.

The calculator is useful for a basic fixed-rate payment illustration, not for a variable-rate line, a refinance comparison, or a complete affordability or approval assessment. Use the lender’s disclosed rate, amount, term, payment schedule, and charges when reviewing an actual offer.

How to Compare and Choose What to Examine

Rather than comparing product names alone, write down how much will be borrowed, when funds are needed, how the rate can change, and when repayment is due. Then compare the complete written terms. For a HELOC, check whether the rate is variable and how payments are calculated during each phase. For a home equity loan, confirm whether the rate and payment are fixed and how long repayment lasts. For a cash-out refinance, include the entire replacement mortgage balance and its costs in the comparison.

Ask for an itemized estimate of charges and a payment schedule, and check whether the quoted payment includes only principal and interest or other amounts too. The calculator’s output is principal-and-interest arithmetic under its stated assumptions; it cannot establish eligibility, determine a property’s value, or account for every lender-specific condition.

Frequently Asked Questions

What are the main types of equity loans?
The main products are home equity loans, HELOCs, and cash-out refinances. They differ in whether funds arrive as a lump sum, are drawn from a credit line, or come from replacing an existing mortgage.

Is a HELOC the same as a home equity loan?
No. A home equity loan generally advances a lump sum with scheduled repayment, while a HELOC is a revolving line that can be drawn over time. The HELOC’s rate and payment structure may vary under its contract.

Is a cash-out refinance a second mortgage?
Usually, it replaces the existing mortgage with a new mortgage rather than adding a separate second loan. A home equity loan or HELOC may instead sit alongside an existing first mortgage.

How much can I borrow against home equity?
There is no universal amount that follows from the value-minus-mortgage calculation. The amount available depends on the lender’s valuation, existing debts, underwriting, and the specific product terms.

Does this calculator work for a HELOC?
It can illustrate a fixed-rate, fully amortizing loan payment, but it does not model revolving draws, changing rates, or different HELOC payment phases. Use the agreement’s details for a product-specific estimate.

Does borrowing against home equity put the home at risk?
Yes. These products are generally secured by the property, and not meeting the repayment obligations can put the home at risk. Review the written terms and obtain exact figures from the lender before relying on an estimate.

This result is an estimate for education; the lender’s disclosure gives the exact figures.

Related

• Escrow Savings Account: How It Works
• Escrow Account Termination: Steps and Refunds
• Escrow Account vs Trust Account: Key Differences

in p | Loan amount | $ | 20000 | 1 | 100000000
in apr | Interest rate (APR) | % | 8 | 0.01 | 100
in yrs | Loan term | years | 5 | 0.0833 | 50
out pmt | Monthly payment | $ | p * (apr / 1200) / (1 - (1 + apr / 1200) ^ -(yrs * 12)) | 2
out int | Total interest | $ | pmt * yrs * 12 - p | 2