Home Equity Calculator Amortization

Amortization Formulas:

\[ I_k = B_{k-1} \times r \] \[ P_k = PMT - I_k \] \[ B_k = B_{k-1} - P_k \]

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1. What is Home Equity Amortization?

Home equity amortization refers to the process of paying off a home equity loan through regular payments over time. Each payment covers both interest and principal, with the proportion shifting over the loan term.

2. How Does the Calculator Work?

The calculator uses standard amortization formulas:

\[ I_k = B_{k-1} \times r \] \[ P_k = PMT - I_k \] \[ B_k = B_{k-1} - P_k \]

Where:

$ I_k $ — Interest payment in period k ($)
$ B_{k-1} $ — Loan balance before period k ($)
$ r $ — Monthly interest rate (decimal)
$ P_k $ — Principal payment in period k ($)
$ PMT $ — Monthly payment amount ($)
$ B_k $ — Loan balance after period k ($)

Explanation: The formulas calculate how each payment is allocated between interest and principal, showing the gradual reduction of the loan balance over time.

3. Importance of Amortization Schedule

Details: An amortization schedule helps borrowers understand how much of each payment goes toward interest vs. principal, plan for tax deductions, and see the long-term cost of borrowing.

4. Using the Calculator

Tips: Enter the loan amount in dollars, annual interest rate as a percentage, and loan term in years. The calculator will generate monthly payment details and a complete amortization schedule.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between home equity loans and HELOCs?
A: Home equity loans provide a lump sum with fixed payments, while HELOCs work like credit cards with variable rates and flexible borrowing.

Q2: How does extra payments affect amortization?
A: Extra payments directly reduce principal, shortening the loan term and reducing total interest paid.

Q3: What is loan-to-value ratio (LTV)?
A: LTV compares loan amount to property value. Most lenders require LTV below 80-85% for home equity loans.

Q4: Are home equity loan payments tax deductible?
A: Interest may be deductible if used for home improvements, but tax laws vary. Consult a tax professional.

Q5: What happens if I sell my home before paying off the loan?
A: The loan must be paid off from the sale proceeds before you receive any remaining equity.