Home equity loan repayments typically are fixed payments over a set period of time. Find out how home equity loan repayment works, how you can calculate your payments, and more about alternatives to making regular payments.
What To Know About Home Equity Loan Repayment
After you close on your home equity loan, you can expect to start making payments within two months of closing, as you would with a first mortgage. You should receive a statement from your lender every billing cycle, which is typically monthly and separate from your mortgage statement. This document includes your payment due date, payment amount, interest rate, balance details, and payment coupon. It may also include your escrow and property tax information.
How Do Payments Work?
You’ll need to submit your first payment by the due date, which is typically on the first day of the month. Part of your payment will go toward the loan’s principal, or original balance, while the remainder goes toward interest. These loans use simple interest rather than compounding interest. In addition, home equity loans are amortized, where more money goes toward interest than the principal during the early part of the loan term. If you fail to make your payment by the due date, your lender may offer a short grace period to pay the loan before you are subject to late fees. After 30 days, the lender can report the late payment to the three main credit bureaus, and your credit score could take a hit. After 120 days, the lender can usually start the process of foreclosing on your home.
How Do You Submit Payments?
You may set up automatic payments or manually make electronic payments through your lender’s portal. You’ll usually also have an option to pay by phone or visit a branch. If you’d prefer to pay by mail, you’ll send your payment coupon with a check or money order to your lender.
How Long Do You Have To Repay a Home Equity Loan?
Your specific loan term determines your repayment period, and it may be as short as five years or as long as 30 years. Your monthly payments continue until the loan balance reaches zero. Upon payoff, the loan no longer counts against your home’s equity.
How To Calculate Home Equity Loan Payments
You usually don’t need to calculate your home equity loan payment yourself. During the loan application process, you’ll get a loan estimate with the monthly payment amount that stays fixed throughout the term. You’ll also find your payment amount on your monthly statement and lender portal. However, you can use a loan calculator to estimate your payment and simply plug in the numbers. You’ll need to know the loan amount, interest rate, and term. You also can do the calculation by hand using the following formula for simple interest amortized loans: Monthly payment = {P x (r/n) x [(1 + r/n)^n(t)]} / {(1 + r/n)^n(t)] - 1}, where P stands for your original home equity loan principal, r stands for the annual interest rate, n stands for the annual number of payments, and t stands for the term in years.
Deciding How Much To Pay
To avoid default, make at least your minimum home equity loan payment on time. If you can’t make your payment, contact your lender about payment arrangements. Avoid skipping a payment or making a lower payment without providing notice.
Alternatives to Home Equity Loan Repayment
If you want a lower payment, different term, or lower interest rate, consider some alternatives to paying back your home equity loan.
New Home Equity Loan
Refinancing involves getting a new home equity loan to pay off your current one. This could provide a chance to get a larger loan amount if you have enough equity to qualify, or to lock in a better interest rate than you currently get. Refinancing usually comes with closing costs and requires that your combined loan-to-value ratio (including the existing home equity loan) isn’t too high to qualify.
Home Equity Line of Credit (HELOC)
A HELOC also allows you to tap your home equity, but it provides you with a revolving credit line with funds you can use for any purpose, including paying off your home equity loan. A HELOC works to pay down your home equity loan if you have enough remaining equity to qualify. It offers the flexibility of an open credit line for a specific draw period. A HELOC typically has a variable interest rate, so your payment amount can change. It also carries the possibility that you will face a balloon payment, or larger payment, at the end of your loan.
Cash-Out Refinance
If you qualify for refinancing your original mortgage, you could get a cash-out refinance loan that allows you to take out a larger mortgage to access your equity. You can use that money to pay off the home equity loan and roll the amount into your mortgage.
0% Balance Transfer Offer
If your credit card issuer allows it, you could use a 0% balance transfer offer to move over all or a portion of your home equity loan balance and save on interest. This works best if you have a lower balance you can fully pay off before the promotional period ends. It’s important that you have a plan for paying down the credit card before the introductory term ends. Otherwise, you’d likely end up paying a significantly higher rate for your credit card than your home equity loan, and you could go deeper into debt. You often have to pay a balance transfer fee for using balance transfers. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning! Your lender can start the foreclosure process if you default on your payments. Your lender will usually notify you of your default within the first 45 days, and begin the foreclosure process after 120 days.
