Do you have significant outstanding consumer debt? This calculator makes it easy for homeowners to estimate how much interest they will save by consolidating many unsecured debts & other high-interest debts into a low-interest home equity loan.
Enter each one of the debts that you would like to pay off, along with their corresponding principal balances, interest rates, and monthly payment amounts. Once you have all your debts entered, make any desired changes to the "New Loan Information" default entries (including if you want any additional cash back) and then click on the "Calculate New Loan" button.
If you want to obtain a home equity loan but do not have any debts you are paying off with the money you can leave the top section of the calculator blank and enter your loan information in the row above the calculation button to figure the payments on your home equity loan.
We publish current San Diego mortgage rates in an interactive table which allows you to compare and contrast monthly payments and interest rates for first and second mortgages.
Calculate Home Equity Loan Payments
Enter Any Debts You Would Like to Pay Off With Your New Loan
Current San Diego Home Equity Line of Credit Rates
The following table highlights current HELOC rates from lenders serving the San Diego area.
Understanding How Home Equity Loans Work
Home equity is a valuable source of wealth that homeowners can tap. It increases the longer you make mortgage payments, and when your property’s value appreciates over time. In practical terms, home equity is the current market value of your home minus any mortgage balance attached to that property. It shows how much of your home you’ve paid versus how much you still owe.
In the fourth quarter of 2020, an estimated 30.2% of 59 million mortgaged homes in the U.S. were considered equity-rich, according to ATTOM Data Solutions. That’s about one in three homes, which is equivalent to around 17.8 million residential properties. A homeowner is considered equity-rich when the amount of loan secured by the property is 50% or less than the home’s estimated market value.
Once you have significant home equity, you can borrow against it to cover important expenses. This includes paying for home renovations, credit card debts, college tuition, or even medical bills. But if you want to restore equity into your home and increase its value, it’s best used for substantial home improvements.
To access home equity, homeowners can take a home equity loan. Our article will explain how home equity loans work and the requirements you need to obtain this type of financing. We’ll discuss how different it is from a home equity line of credit (HELOC) as well as from a cash-out refinance. We’ll show you the advantages and drawbacks of taking this type of loan, and compare it with other financing alternatives.
What is a Home Equity Loan?
A home equity loan is a kind of second mortgage which allows you to borrow money against property with an existing mortgage. Just like your first mortgage, it also uses your house as collateral to secure the loan. First mortgages have senior priority on payments in case of default. For this reason, to compensate for the greater risk, second mortgages typically charge a higher interest rate compared to first mortgages.
If you’re looking to borrow a considerable amount of funds, having higher home equity means you can borrow a larger loan amount. Home equity loans are given as a one-time lump sum money which comes at a fixed rate. Since the rate stays locked, it ensures your monthly payments won’t change during your payment term. The terms can last for 5, 10, 15, or up to 30 years.
A home equity loan is ideal if you’re borrowing a definite amount that won’t be used for extended expenses. Unlike a home equity line of credit (HELOC), you won’t be tempted to withdraw more money in succeeding years. But because it’s does not come with a revolving credit, more borrowers tend to choose HELOCs.
How much can you borrow on a home equity loan? According to Experian, most lenders allow you to obtain between 75% to 85% of your home’s equity. For example, if you have $100,000 worth of home equity, $75,000 to $85,000 may be available to you.
Moreover, lenders want to make sure you do not borrow more than 80% of your home’s market value. The percentage of your home’s available value is called loan-to-value ratio (LTV), which compares your mortgage amount with your property’s appraised value. Though some lenders might allow an LTV ratio of over 80%, they would normally charge higher interest rates.
When it comes to interest rates, since home equity loans are secured debt, they commonly have lower rates than personal loans. As of May 3, 2021, the average rate range for a home equity loan is between 3.25% to 7.11%. On the other hand, depending on the lender, rates for personal loans with a term of two to seven years can range from 5.99% to 18.85%. If you have bad credit, it can be as high as 35.99%. Thus, you’ll save more on interest with a home equity loan than a personal loan.
If fees and rates seem high with a particular lender, it pays to shop around for different loan providers. This will allow you to obtain competitive quotes. In the end, you can choose the lowest rate with the most favorable term.
Keep Track of Loan Payments
Taking a home equity loan or any type of second mortgage (such as a HELOC) involves making separate monthly payments from your first mortgage. That said, it can make monthly payments more complicated, especially if you have several other debt obligations. If you choose this option, remember to keep track of your primary and second mortgage payments accordingly.
If you prefer to make one mortgage payment a month, It’s possible to merge your first and second mortgage into one loan. But note that general market rates should be low enough to consolidate both loans to obtain substantial savings.
Qualifying for a Home Equity Loan
To be eligible for this type of financing, homeowners must have sufficient equity. To determine how much money you can borrow, a lender will have your home appraised. This procedure verifies your home’s current market value. It also helps your lender calculate the maximum amount you can borrow based on your property’s value and your equity on the home.
How much equity should you have? Most lenders require you to have at least 15% to 20% equity on your home. But again, the higher your home equity, the more money you can borrow. Having a higher equity is also less risky for the lender. Thus, it’s ideal to take this type of loan if you’ve gained at least 50% or more equity on your property.
Just like other consumer debt, lenders will check if you have a good credit score. Generally, to secure approval, you’ll need a FICO credit score of at least 620 and above. However, if you want higher chances of approval with more favorable rates and terms, you should aim for a credit score of 700 and above. Expect lenders to scrutinize your credit report. They will review it for consistent on-time payments and any instances of missed or overdue payments. Likewise, a clean credit record means better chances of securing a home equity loan.
Credit score and credit history directly impacts interest rates on home equity loans. If you have a poor credit score, make sure to improve it before applying. Increasing your credit rating will help lower the interest rate, which ultimately yields significant savings in the long term.
The Risks of Applying with Bad Credit
Compared to other types of loans, it may be easier to qualify for a home equity loan even with bad credit. Lenders are able to manage this risk because the loan is secured by your property. However, approval is not guaranteed and you’ll end up with a higher interest rate. If you can’t keep up with the payments, the lender can eventually foreclose your home to recoup the costs. Think about this risk before applying for a home equity loan with bad credit.
Besides your credit rating, a lender will also evaluate your debt-to-income ratio (DTI). DTI ratio is basically an indicator that compares your total monthly debts with your gross monthly income. This helps lenders assess whether you are in a good financial positions to carry more debt. Generally, a lower DTI ratio means you can afford to make consistent payments on your loan. In some cases, if your credit score is insufficient, having a low enough DTI ratio can help you qualify for a home equity loan.
What’s the required DTI ratio? To be eligible for a home equity loan, your DTI ratio must not exceed 43%. This is based on the back-end DTI calculation. But of course, this still depends on the lender, with some allowing up to 50% DTI ratio. To estimate your back-end DTI ratio, you can use the formula below and follow these steps:
Back-end DTI = Total Monthly Debt Payments / Gross Monthly Income
- Add all your debt payments for the month. This includes your first mortgage payment (all other housing-related costs), auto loan, credit card debt, student loan, child support, etc.
- Once you’ve added all your monthly debts, divide the sum by your gross monthly income. The gross monthly income is the amount you earn every month before taxes.
- Finally, multiply the result by 100. This gives you the equivalent DTI percentage.
Let’s take this simple example. Suppose your first mortgage payment is $1,200, your car loan payment is $500, and you pay $300 a month for credit card debt. That’s a total monthly debt of $2,000. If you earn $5,000 a month before taxes, here’s your resulting back-end DTI ratio:
1,200 + 500 + 300 = 2,000
= 2,000 / 5,000
= 0.40 x 100
In this example, your DTI ratio is 40%. It is slightly lower than 43% to qualify for a home equity loan. To reduce your DTI ratio, it would help to lower or eliminate some of your oustanding debts. Furthermore, it would greatly help if you can find ways to increase your monthly income. This would take time, so make sure to improve your financial standing and credit score before taking any new loan.
The Closing Costs
Once your loan is approved, don’t forget to factor in the closing costs. For home equity loans, the closing costs range between 2% to 5% of your loan amount. This expense covers your home appraisal, document preparation, title search, and application fee.
For example, let’s say you have $100,000 of home equity and you decided to borrow $75,000. This means your closing cost can run anywhere from $1,500 to $3,750 of your loan amount. Take note of this extra expense when you take a home equity loan.
Is It Tax Deductible?
Prior to the implementation of the 2017 Tax Cuts and Jobs Act (TCJA), taxpayers were entitled to claim deductions for interest paid on all home equity loans. This was granted for previous tax years up to 2017. Back then, homeowners could deduct interest on up to $100,000 of second mortgage debt regardless of how the money was used. However, under the TCJA from 2018 onwards, you are no longer allowed to make home equity loan interest deductions unless you use the loan money to purchase, build, or substantially improve your home.
If you make major home improvements that increase your home’s value, the cost of those improvements can also figure into your purchase basis for the home. But note that most homeowners do not exceed the primary residence sale capital gain exclusion of $250,000 for individuals or $500,000 on joint-filed returns.
For loan proceeds used for different purposes, you may still be able to deduct interest. That’s if you used a portion of the funds to make significant improvements on your home. For instance, you used the money to pay off a credit card debt, cover college tuition, and build an extra room for your house. The percentage of the loan money that’s considered origination debt may qualify for tax deductible expenses. Just be sure to keep receipts for home improvements. Discuss your situation with an accountant to help you determine if your home improvement expenses qualify for a tax deduction.
Tax Deductibility for First Mortgages
After the TCJA, interest on first mortgage debt is still tax deductible. However, the cap on interest deductibility was lowered from $1,000,000, to $750,000 of mortgage debt for those married filing jointly. For married couples filing separately, the cap on interest deductibility was reduced from $750,000 to $375,000.
Another TCJA tax consequence is it lowered the state and local income tax (SALT) deduction. SALT deductions originally did not have a limit, but after the TCJA, it has a maximum cap of $10,000. Residents of many coastal states with high property values and high property tax were impacted by the SALT deduction limit.
The Difference Between HELOCs & Home Equity Loans
Another type of second mortgage is a home equity line of credit or HELOC. Unlike home equity loans with fixed rates and a definite loan amount, a HELOC provides a revolving credit line that works much like a credit card. The withdrawal flexibility allows you to borrow money against your home equity as needed. This comes with a credit limit based on your accumulated home equity. People use it for emergencies and extended costs such as medical bills, college tuition, and other important expenses.
You can access funds during the draw period, which is usually around 10 years. After the draw period, you are no longer allowed to take more funds. At this point, you are obligated to pay back your loan for the remaining term, which can be another 10 years. Generally, HELOC terms last from 5, 15, up to 20 years. You can only withdraw credit up to the approved limit, and you only pay interest against the credit you owe.
Another key difference is the interest rate. Compared to home equity loans with fixed rates, HELOCs come with adjustable interest rates. This is tied to a set margin above a reference benchmark index such as the prime rate. Once the benchmark rate increases, expect your HELOC’s interest rate to rise. This means monthly payments on your loan will also get higher. However, HELOCs come with rate caps which prohibit your APR from increasing beyond a certain limit. If unpredictable payments are an issue for you, you’re probably better off with a home equity loan instead. Remember this drawback if you intend to maintain a HELOC for 20 years.
Generally, HELOCs do not usually charge closing costs. However, lenders may ask you to pay $300 to $400 for a home appraisal. You must also pay an annual fee of around $100 to keep your HELOC account active.
How About Cash-out Refinancing?
Like home equity loans, getting cash-out refinancing involves tapping into your home’s equity. However, cash-out refinances are not second mortgages. When you take this option, it allows you to change your existing mortgage into a new loan with a more favorable rate and term. This is most ideal when market rates generally fall and you have a high credit score that makes you eligible for more competitive rates.
When you take a cash-out refi, you are borrowing a higher amount over your existing mortgage balance. The difference between your original mortgage balance and your refinanced loan is the money you receive as a cash-out. Depending on how much you choose to cash out, expect your new mortgage to have a higher balance than your original mortgage.
What are the required LTV limits? If you intend to leverage your home equity through a cash out refinance, you can borrow anywhere between 80% to 90% LTV of your home’s value. This is if your credit is in good standing. Few banks will lend above this level, and those that do, typically require the borrower to pay higher interest rates or other fees to compensate for the risks the lender must carry.
Government-sponsored mortgages, on the other hand, specify their own LTV limits for cash-out refis. Prior to August 2019, the Department of Housing and Urban Development (HUD) had higher LTV limits. These were 85% for FHA cash-out refis, and 100% for VA cash-out refis. After this, mortgages backed by the U.S. Federal Housing Authority (FHA) now provides cash-out refinances of up to 80%. For home loans backed by the U.S. Veterans Affairs (VA), cash-out refinances are now granted up to 90%. These lower LTV limits were enforced to help reduce lending risk among the HUD’s home financing programs.
Cash-out Refinance Closing Costs
Cash-out refinances are essentially new mortgages that replace your old loan. The difference is it pays your remaining balance plus the money you borrowed against your equity. Because it is a new loan, it comes with steep closing costs, which is usually between 3% to 6% of your loan amount. For example, if you have a remaining loan of $200,000, your closing cost can range between $6,000 to $12,000. This is a considerable fee, so make sure to prepare your budget before choosing this option.
When Not to Take a Cash-out Refinance
If your primary goal is to borrow money, you might be better off taking a home equity loan or HELOC instead. Unless you actually want to change your current mortgage, it might be too taxing to obtain a cash-out refi. It would not make sense to refinance if you cannot obtain a lower interest rate, and if you cannot afford the expensive closing costs.
Home Equity Loan Pros and Cons
Before you take on new debt, be mindful of its benefits and disadvantages. The following table summarizes the pros and cons of choosing a home equity loan.
|The interest rate remains fixed for the entire loan, monthly payments stay the same.||Expect to pay closing costs. This is more expensive than fees you pay for personal loans.|
|It’s easier to qualify for than other consumer loans because your debt is secured by your home.||You pay a separate mortgage on top of your primary mortgage, which takes extra effort to track.|
|If you use the loan to buy, construct, or substantially improve your house, you can claim a tax deduction.||It’s a one-time lump sum money. It’s not flexible like HELOCs that provide revolving credit.|
|You’ll likely spend less interest on a home equity loan secured by your home than a personal loan.||If you sell your house, you must pay your home equity loan right away, like with your first mortgage.|
|If you’ve built high home equity, you can borrow a considerable amount of money.||In rare cases, if your home’s value drops, you’ll owe more than the home is worth.|
|Unlike HELOCs with revolving credit, you won’t be tempted to keep withdrawing toward your limit.||If you are unable to keep up with the payments, you lose your home to foreclosure.|
As long as you can afford to make consistent payments, taking a home equity loan can really be worth it. It’s beneficial if it can help you pay for the following important expenses:
- Home and car repairs
- Uncovered medical or dental bills
- Emergencies such as accidents
- Large tax bills you did not expect
- Legal expenses you need to cover
Consolidating Your Debts
Use the above calculator to compare how much you’ll spend when you consolidate your debts with a home equity loan. Let’s take the following example. Suppose you want to consolidate the following credit card, auto loan, and student loan debts.
|Debt||Loan Balance||Rate||Payment Amount||No. of Payments Left||Interest Left|
Based on this example, your total loan balance is $48,000, and your total monthly payments amount to $1,310. The interest left on your debts amount to a total of $5,685.27.
Now, you’re thinking about taking a $44,000 home equity loan at 6% interest with a term of 15 years. The closing costs amount to $2,200. Here’s how your current debts would compare to your consolidated debt with a new home equity loan.
|Results||Current Debt||New Loan|
|Total Principal Balance||$48,000||$98,200|
|Effective Rate Before Taxes||8.25%||6%|
|Total of Monthly Payments||$1,310||$828.67|
|Monthly Payment Reduction||—||$481.33|
In this example, consolidating your debt would increase your total principal balance from $48,000 to $98,400. Your effective interest rate before taxes prior to consolidating was 8.25%. But after consolidating, it’s reduced to 6%. Because you chose a 15-year term, this stretched your monthly payments longer. This also effectively reduced your monthly payment from $1,310 to $828.67 per month, which is lower by $481.33.
Without consolidating your debt, you’ll be able to pay off your student loan within 2 years, and your credit card debt in 4 years. You could also pay off your auto loan debt in a little over 4 years. Though it significantly lowered your monthly payments, you now have to make monthly payments for 15 years. This made your debt last longer. On the other hand, if you are really struggling with the monthly payments, and you need more time to pay your debt, this could be a viable arrangement. Just make sure to keep up with the payments so you don’t risk losing your home to foreclosure.
Be Careful with Consolidating Debt
For people with high-interest debts, it might make sense to consolidate debts with a low-rate home equity loan. This can work especially if you’re diligent about budgeting your money to pay off your balances. However, such strategy must be approached with caution. It’s not a good idea if your finances are too tight and if you feel you’ll miss payments.
Moreover, if your large balances were caused by overspending, consolidating debts with a home equity loan won’t solve the problem. You’re merely exchanging unsecured debt for secured debt. This puts you at great risk of losing your home. You must address spending issues first if you want to avoid recurring debt.
Alternatives to Home Equity Loans
In some cases, people don’t want to risk their property as collateral to secure a loan. Some consumers just don’t want to put their home on the line when it comes to debt. If you’re looking for other financing alternatives, consider the following options:
As mentioned, interest rates on personal loans are typically higher than secured debt. Rates on personal loans are around two to three times higher than home equity loans. However, they do not charge steep closing costs, and come with cheaper rates compared to most credit cards. Repayment terms vary per lender, but these usually last for three to seven years.
Money from personal loans can be used for any purpose. How much credit a lender can extend is determined by your income and your credit history. Again, be sure to improve your credit score before taking any type of loan.
While credit cards offer a revolving line of credit that makes borrowing easy, it’s usually very expensive. In April 28, 2021, the average APR for brand new credit cards is 16.15%, according to CreditCards.com. But this can easily vary between 20% to 30%, depending on your provider. It makes credit card rates around two times higher than personal loans. Avoid using credit cards if you cannot pay off the balance quickly. Make sure to limit large expenses for emergencies.
0% APR Introductory Credit Cards
If you’re looking to consolidate debt, look into 0% balance transfer credit cards. This option basically allows you to transfer balances from other accounts free of charge. This is a temporary offer which allows you to avoid interest rates for nine to 21 months, depending on your credit card provider. Take advantage of the zero-interest period to pay off as much of balance as you can. This strategy can help eliminate your debt faster.
If you’re an elderly homeowner looking to borrow cash, consider taking a reverse mortgage. The government offers federally insured reverse mortgages called Home Equity Conversion Mortgages (HECM). It’s ideal for seniors who want to supplement their income using equity they’ve built in their home. Unlike a home equity loan or HELOC, this is not a second mortgage.
A reverse mortgage allows you to tap money from your home equity without selling or moving out of your property. It also does not require monthly mortgage payments. Borrowers must repay the mortgage only when they decide to sell the house, or when the home is sold after the borrower passes away. If you get an HECM, you have the option to obtain your disbursement as a single lump sum amount, a regular periodic payment, or a line of credit. You may also receive it as a combination of periodic monthly payments and a line of credit, depending on your arrangement with your lender.
To be eligible, you must be 62 years of age or older, and own a home that’s been paid with significant equity. You must also occupy the property as your principal residence while you are receiving the disbursement. For full details on HECM qualifications, visit the HUD HECM program page.
Many homeowners leverage home equity to borrow funds for important expenses. Depending on your needs, you can use the loan proceeds to pay for substantial home improvements, cover college tuition, medical expenses, and other essential costs. Home equity loans are a kind of second mortgage, which means it’s secured by the same property that secures your primary mortgage. Thus, you must make monthly mortgage payments separately on your first and second mortgage.
Home equity loans come as one-time lumpsum fund. It also has a fixed rate, which guarantees the same monthly payments for the agreed term. Home equity loans typically have slightly higher interest rates than your primary mortgage. In the event of default, the first lender receives priority before the second lender is paid. This is the reason why second lenders charge a higher interest rate.
Moreover, prior to the Tax Cuts and Jobs Act in 2017, borrowers with home equity loans were entitled to tax deductions. But from 2018 onwards, tax deductions can only be claimed on home equity loans or HELOCs if borrowers use the money to make significant home improvements. A HELOC is another type of second mortgage which is characterized by adjustable rates and revolving credit. You are only allowed to withdraw up to a certain limit, but you can withdraw as needed within the draw period. This access to flexible money makes HELOCs a more popular option for borrowers.
Besides home equity loans and HELOCs, there are other financing alternatives you can try, such as personal loans. Just remember that unsecured debts usually come with much higher interest rates. And as with any type of loan, be sure to improve your credit score and get your finances in order before taking on new debt.
San Diego Borrowers: Are You Unsure Which Loans You'll Qualify For?
We have partnered with Mortgage Research Center to help San Diego homebuyers and refinancers find out what loan programs they are qualified for and connect them with San Diego lenders offering competitive interest rates.