How can I calculate home equity loan payments?Answer:
The calculation of home equity loan payments is similar to the calculation of any other fixed rate loan because the only difference between a home equity loan (HEL) and a regular loan is that the HEL is secured with your equity in your home.
Steps to Calculate Home Equity Loan Payments:
To calculate your home equity loan payments you have to first know the following:
- The interest rate on the loan
- The total amount of the loan
- The payback period
Then you can calculate your monthly payments using the following formula:
M = P [ i(1 + i)n ] / [ (1 + i)n - 1], where:
- M is the monthly payment
- P is the Principal amount
- n is the payback period in no. of months
- i is the monthly interest rate
And that's it, you are done! M will be your monthly home equity loan payment.
Of course the calculation would be trickier if the loan were an interest-only loan. Then the monthly payments would be different in the early years and in the later years. Let's view an example of that case so that you'll have a better understanding.
Example of an Interest-only Home Equity Loan:
Consider an interest-only HEL of $150,000 at 9% interest rate. The payback period is 10 years and the interest-only period runs for 3 years.
The monthly payment for the interest-only 3 years would be:
3 years = 9% * $150,000 / 12
M first 3 years = $1125
The monthly payment for the last 7 years would be calculated exactly like a regular HEL with payback period of 7 years. Using the equation mentioned above:
M last 7 years = $2413
So for the first 3 years the payment would be $1125 and for the last 7 years it would increase to $2413.
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