How To Repay a Home Equity Loan. A lump-sum second mortgage that allows you to borrow money against the equity in your home is called a home equity loan. You must pay back the money borrowed in accordance with the loan’s terms, just like with any other loan.
Repayments on home equity loans are frequently made in preset amounts over a predetermined time. Learn more about repayment options for home equity loans, how to calculate your payments, and alternatives to making monthly installments.
What To Know About Home Equity Loan Repayment
As with a first mortgage, you may anticipate that you will begin making payments on your home equity loan two months after closing.
Every billing cycle, which is normally monthly and is distinct from your mortgage statement, your lender should send you a statement. Your payment due date, payment amount, interest rate, balance information, and payment coupon are all included in one paper. Your escrow and property tax information might also be included.
How Do Payments Work?
Your initial payment must be made by the deadline, which is often the first of the month. Your payment will be split between the principal (the loan’s original total), which will receive a portion of it, and interest. Instead of compound interest, these loans use simple interest. Additionally, home equity loans amortize, meaning that during the initial years of the loan term, more money is paid in interest than principal.
If you spend the money for eligible home-related expenses, you may be able to deduct the interest on your home equity loan.
Your lender could grant you a brief grace period to pay off the loan if you miss the due date before you start accruing late fees. After 30 days, the lender has the option of reporting the late payment to the three major credit agencies, which might lower your credit score. The lender can often begin the process of foreclosing on your home after 120 days.
How Do You Submit Payments?
Through your lender’s portal, you can manually or automatically make electronic payments. In most cases, you can also choose to pay in person or over the phone. If you’d rather send a check or money order to your lender, enclose your payment coupon with it.
How Long Do You Have To Repay a Home Equity Loan?
Your repayment duration is determined by the individual loan term, which could be five years or thirty years. Until the loan sum is all paid off, you continue making monthly payments. Once repaid, the loan is no longer deducted against the equity in your home.
The loan term could be extended if you fall behind and your lender agrees to change it. Your repayment period may be shortened by making more payments.
How To Calculate Home Equity Loan Payments
Typically, you don’t have to figure out how much your home equity loan will cost you. You will receive a loan estimate during the loan application process that includes a set monthly payment amount for the duration of the loan. Your monthly statement and the lender portal will both list the amount of your payment.
However, you can enter the figures into a loan calculator to estimate your payment. You must be aware of the loan’s size, interest rate, and period. For loans with simple interest amortization, you can alternatively perform the computation manually using the following formula:
The formula for calculating monthly payments is P x (r/n) x [(1 + r/n)n(t)] / [(1 + r/n)n(t)] – 1 where P is the initial principle of your home equity loan, r is the yearly interest rate, n is the number of payments made annually, and t is the term in years.
Deciding How Much To Pay
Make your minimum monthly home equity loan payment on time to prevent default. Make payment arrangements with your lender if you are unable to do so. Avoid missing payments or paying less without informing the seller.
Putting more money toward the principal can speed up loan repayment, lower your overall interest rate, and increase the equity in your house. Check with your lender to discover whether there is a prepayment penalty before you pay off your loan early.
Alternatives to Home Equity Loan Repayment
Take a look at various alternatives to repaying your home equity loan if you’d prefer a lesser payment, a different term, or a lower interest rate.
New Home Equity Loan
When you refinance, you take out a new home equity loan to pay off your old one. If you have enough equity to qualify, this can provide you the opportunity to receive a bigger loan amount or lock in a lower interest rate than you currently have.
Closing costs are typically associated with refinancing, and you must not have a total loan-to-value ratio that is too high (including the current home equity loan) to be eligible.
Home Equity Line of Credit (HELOC)
You can also access your home equity with a HELOC, which gives you a revolving credit line with money you can use for anything, including repaying your home equity loan.
If you still have enough equity to qualify, a HELOC works to pay off your home equity loan. It provides the adaptability of a credit line that is open for a defined draw term. Since the interest rate on a HELOC is often variable, your payment amount may alter. Additionally, it bears the risk that you’ll have to make a balloon payment—a bigger payment—at the loan’s conclusion.
If you are eligible to refinance your first mortgage, you may be able to obtain a cash-out refinance loan, which would enable you to access your equity by taking out a larger mortgage. With that cash, you can pay off the home equity loan and refinance the remaining balance onto your mortgage.
You would have to go through a drawn-out application process and closing charges for a cash-out refinance. Additionally, you run a higher chance of going “underwater” on your loan if the value of your property declines.
0% Balance Transfer Offer
If your credit card company permits it, you might transfer all or a portion of your home equity loan debt to another card and avoid paying interest by doing so. The optimal scenario for this is to have a lesser debt that you can pay off entirely before the promotional period expires.
You must have a strategy in place for paying off the credit card before the introductory period expires. In any other case, you risk incurring more debt and paying a rate on your credit card that is substantially greater than the rate on your home equity loan. When using balance transfers, you frequently have to pay a fee.
Frequently Asked Questions (FAQs)
What happens if you do not repay a home equity loan?
The lender will often go over your alternatives for bringing your payments up to date and stopping a foreclosure. For instance, you might have access to a program that helps borrowers of home equity loans.
If you fall behind on your payments, your lender may begin the foreclosure process. Within the first 45 days of your delinquency, your lender will typically let you know, and after 120 days, the foreclosure procedure will start.
What are home equity loan rates?
Current market rates as well as elements like your credit score, income, loan length, loan-to-value ratio, and current property valuation will all affect the interest rate on your home equity loan. If you consent to automatic bank withdrawals, certain lenders will offer cheaper rates. To get the greatest deal, compare rates from several lenders. In order to raise your credit score and lower your debt-to-income ratio and raise your rates, you can also pay off other loans.