How to calculate how much home equity you can borrow
Take the home in the answer above: worth $450,000, with $260,000 still owed on the mortgage and a lender that goes up to 85% of its value, and a loan of everything available at 8.50% a year over 180 monthly payments.
- Your equity is what the home is worth less what is still owed on it. A lender will not let everything secured on the home pass 85% of its value, so what you can borrow is that share of the value less the mortgage. $450,000 − $260,000 = $190,000 equity $450,000 × 85% = $382,500 $382,500 − $260,000 = $122,500 available
- Divide the annual rate by twelve to get the rate for one month. It does not come out exactly, so the figure below is rounded; the calculator keeps the exact twelfth. 8.50% ÷ 12 ≈ 0.7083% a month
- Put it into the standard loan payment formula, where P is the amount borrowed, r the monthly rate and n the number of monthly payments. P × r ÷ (1 − (1 + r)^−n) = $122,500 × 0.7083% ÷ (1 − (1 + 0.7083%)^−180) = $1,206.31
- This calculator rounds each month's interest to two decimal places and uses the smallest payment that brings the balance to exactly zero after 180 payments. Here that is the same figure: $1,206.31 a month.
- In the first month the interest is the balance times the annual rate, divided by twelve and rounded to two decimal places, and the rest of the payment repays the loan. $122,500 × 8.50% ÷ 12 = $867.71 interest $1,206.31 − $867.71 = $338.60 repaid $122,161.40 still owed
- Every month repeats that on a smaller balance, and the last payment, $1,204.85, only clears what is left. Over 180 payments you pay $217,134.34 in all, and everything above the amount borrowed is interest. $217,134.34 − $122,500 = $94,634.34 interest
That is where the monthly payment of $1,206.31 and the $94,634.34 of interest in the answer come from. With this loan on top of the mortgage, 85% of the home's value is borrowed against it, the combined loan-to-value a lender checks.
Equity and what a lender will actually lend
Equity is the plain difference between what a home is worth and what is still owed on it. It is a useful number to know and it is not the number a lender works from, because no lender will advance the last slice of a house. What they will go to is a ceiling on the combined loans against the property, and what is available to borrow is that ceiling less the existing mortgage.
The gap between the two figures is the point. A home with substantial equity can still have very little available to draw on, and knowing which number a lender means is the difference between an application that works and one that does not.
That ceiling is a lender convention rather than a rule anybody publishes. It moves with the lender, with the credit assessment and with the market, and it moves downwards fast when house prices fall. The figure on this page is yours to set for exactly that reason.
A second charge, and what that means
A home equity loan sits behind the existing mortgage. The first lender is paid first if the house is ever sold under pressure, and the second lender takes what is left. That is why the rate is higher than a first mortgage and lower than an unsecured loan: there is security, but it is second in line.
It also means the house is at stake in a way it is not with a credit card. Borrowing at a lower rate to clear a higher one is real arithmetic and a genuine saving, and it converts an unsecured debt into one attached to where you live. That is a trade worth making deliberately rather than by accident.
What this page does not model
It works out a fixed-rate loan, fully amortising, taken all at once. Closing costs, valuation fees and any early repayment charge are not in it. Nor is tax: interest on borrowing against a home is deductible in some places under some conditions, and the conditions are specific enough that a calculator guessing at them would do more harm than good.
It also does not judge whether the borrowing is a good idea, which depends on what the money is for and on what else is owed at what rate.
Common questions
Is a home equity loan the same as a second mortgage?
In ordinary use, yes. A second mortgage is any loan secured on a property that already carries one, and a home equity loan is the common form of it. A line of credit is a second charge too, arranged differently.
How is this different from a HELOC?
This page is the lump sum: you take the whole amount now, at a fixed rate, and repay it on a set schedule from the first month. A line of credit lets you draw what you need over a period and charges only the interest while you do, which costs less at first and considerably more later. The HELOC page works that one out.
Why is the amount available lower than my equity?
Because the ceiling applies to everything secured on the home, not just to the new loan. At a ceiling of eighty-five per cent, the first mortgage and the new loan together have to fit inside eighty-five per cent of the value, so the existing balance uses the allowance up first.
What if house prices fall?
Then the available amount falls with them, and faster than the value does, because the existing mortgage does not shrink to match. This is the mechanism that closes equity borrowing off in a downturn, which is also when people most want it.
Is anything I type stored?
No. The calculation happens on the server as part of rendering the page, nothing is written down, and the access log for this site drops the query string precisely so that the numbers you enter are never recorded.
Sources
The arithmetic is ours. The one number on this page that belongs to a lender rather than to a rule is the ceiling, and it is yours to set.
How the payment is worked out
The loan is a fixed-rate, fully amortising second charge on the home, worked out on the same integer schedule every loan page here uses.
Available to borrow is the home value multiplied by the ceiling, less what is still owed. Equity is the plain difference between value and balance, and the two are not the same figure: a lender will not lend against the last slice of a home.