📈 Home Equity Calculator

Most lenders require 15-20% equity minimum:

Home Equity Loan (fixed rate, lump sum):

• Need 15-20% equity to qualify
• Can borrow up to 85% of home value
• Example: $400K home, owe $300K = $100K equity (25%)
• Can borrow: ($400K × 0.85) - $300K = $40K

HELOC (line of credit, variable rate):

• Need 15-20% equity
• Can access up to 85% LTV
• Draw period (10 years) then repayment period
• Interest-only payments during draw period

Cash-out Refinance:

• Need 20% equity to remain after cash-out
• Replace existing mortgage with larger one
• Take difference in cash
• Current rates apply to entire loan

Example: $500K home, $250K owed

• Current equity: $250K (50%)
• HELOC limit: ($500K × 0.85) - $250K = $175K available
• Cash-out refi: Take $150K cash, new loan $400K (80% LTV)

Equity benchmarks by years owned:

Years 1-5: 10-25% equity

• Started with 3-20% down payment
• Principal paydown is slow early on
• Appreciation adds 4-5%/year
• Normal to have under 30% equity

Years 5-10: 25-40% equity

• Principal paydown accelerates
• Appreciation compounds
• May have made improvements
• 30% is solid position

Years 10-20: 40-70% equity

• Significant principal paid
• Appreciation substantial
• 50%+ equity = strong position
• Can access equity for opportunities

Years 20-30: 70-100% equity

• Approaching payoff
• Massive appreciation over decades
• Consider whether to pay off early

Minimum targets:

• 20% equity: Can remove PMI
• 30% equity: Can tap for HELOC
• 50% equity: Strong financial position
• 80% equity: Near financial freedom

$400K home, 20% down, 7% interest, 4% appreciation:

Year 1:

• Started: $80K equity (20%)
• Principal paid: $4,200
• Appreciation: $16,000
• End year 1: $100,200 (24%)

Year 5:

• Principal paid: $28,500 total
• Appreciation: $86,700 total
• Equity: $195,200 (40%)

Year 10:

• Principal paid: $66,800
• Appreciation: $192,100
• Equity: $338,900 (57%)

Year 15:

• Principal paid: $119,400
• Appreciation: $320,600
• Equity: $520,000 (72%)

Key insights:

• First 10 years: Appreciation drives most growth
• Years 10-20: Principal paydown accelerates
• After year 15: Building equity rapidly
• By year 30: Home worth 3x original price, fully paid

Acceleration tactics:

• Extra $200/mo payment = Build equity 30% faster
• $25K renovation adding $40K value = Instant $15K equity
• Refinance from 30 to 15-year = Double principal paydown rate

Good reasons to use home equity:

1. Home improvements that add value

• Kitchen remodel: Borrow $50K, adds $60K value
• Bathroom upgrade: Borrow $25K, adds $30K value
• You're borrowing against value you're creating

2. Debt consolidation (if rates lower)

• Credit cards at 20% → HELOC at 8% = Save $12K/year
• Must have discipline not to run up cards again
• Total interest savings can be massive

3. Investment with higher return

• HELOC at 8%, rental property returns 12% = Net 4% gain
• Business opportunity with proven ROI
• Education that significantly boosts income

4. Emergency vs losing home

• Job loss and need cash to survive
• Medical emergency
• Better than foreclosure

Bad reasons to tap equity:

1. Lifestyle inflation

• New car, vacation, furniture
• You're converting home equity to depreciating assets
• Puts home at risk for consumption

2. Risky investments

• Crypto, penny stocks, MLM "opportunities"
• If investment fails, you still owe the money
• Could lose your home

3. To buy investment you can't afford

• If need home equity to buy rental, can't afford it
• Should have separate emergency fund
• Don't put primary residence at risk

Smart approach:

• Keep 6-month emergency fund in cash
• Use HELOC only for value-adding purposes
• Have clear payoff plan before borrowing
• Treat home equity as last resort, not ATM

Home Equity Loan (Second Mortgage):

Structure:

• Lump sum payment upfront
• Fixed interest rate
• Fixed monthly payment
• Term: 5-30 years (typically 10-15)

Best for:

• One-time expense (kitchen remodel)
• Debt consolidation
• When you know exact amount needed
• Want payment predictability

Example:

• Borrow $50K at 8.5% for 10 years
• Payment: $622/month
• Total repaid: $74,640

HELOC (Line of Credit):

Structure:

• Credit line you draw from as needed
• Variable interest rate
• Interest-only payments during draw period (usually 10 years)
• Then repayment period (10-20 years)

Best for:

• Ongoing expenses (college tuition over 4 years)
• Emergency fund backup
• Project with uncertain costs
• Want flexibility

Example:

• $100K line of credit at Prime + 1% (currently ~9%)
• Draw $30K, pay $225/month interest-only
• Draw more or pay down anytime
• After 10 years, must pay principal + interest

Key differences:

Interest rate: Loan = fixed, HELOC = variable (can spike)

Flexibility: Loan = none, HELOC = use as needed

Fees: Loan = closing costs ($2-5K), HELOC = often no fees

Predictability: Loan = payment never changes, HELOC = changes with rates

Which to choose:

• One-time need + want certainty = Home Equity Loan
• Ongoing need + want flexibility = HELOC
• Can't decide? HELOC and only draw what you need

No! Equity stays the same unless you do cash-out refi.

Rate-and-term refinance (NO cash-out):

Before refi:

• Home value: $500K
• Loan balance: $300K
• Equity: $200K (40%)

After refi to lower rate:

• Home value: $500K
• New loan: $300K (same balance)
• Equity: $200K (40% - unchanged!)

Your equity didn't change at all. Just got better rate/terms.

Cash-out refinance:

Before:

• Home value: $500K
• Loan balance: $300K
• Equity: $200K

After cash-out refi (take $75K):

• Home value: $500K
• New loan: $375K ($300K old + $75K cash)
• Equity: $125K (reduced by cash taken)

What DOES reset your equity progress:

1. Cash-out refinance

• Taking $50K cash = Lose $50K equity
• Starting principal paydown over
• Only do if using money wisely

2. Extending loan term

• Had 15 years left, refi to new 30-year
• Monthly payment drops but pay more interest
• Equity builds slower

What doesn't affect equity:

• Lowering interest rate
• Removing PMI
• Changing from ARM to fixed
• Switching lenders
• Adding someone to title

Smart refi strategy:

1. Refi to lower rate WITHOUT extending term
2. Had 25 years left? Get 25-year refi, not 30
3. Keep same payment = Builds equity faster
4. Or lower payment but pay extra to match old payment