HELOC Borrowing Limit Calculator
Understanding Your Equity Line of Credit (HELOC)
A Home Equity Line of Credit, or HELOC, is a revolving credit line that allows homeowners to borrow against the equity they have built in their property. Unlike a standard home equity loan, which provides a lump sum, a HELOC functions more like a credit card where you can draw funds as needed, pay them back, and draw them again.
How the HELOC Limit is Calculated
Lenders use a specific formula to determine how much credit they are willing to extend to a borrower. This calculation is primarily based on the Loan-to-Value (LTV) ratio. Most lenders allow for a combined LTV (CLTV) of up to 80% or 85% of the home's appraised value.
The standard formula used by our calculator is:
Realistic Calculation Example
Let's look at a typical scenario for a homeowner in a growing market:
- Appraised Home Value: $500,000
- Lender's Max LTV: 85%
- Existing Mortgage: $300,000
First, calculate the maximum total debt the lender allows: $500,000 × 0.85 = $425,000. Next, subtract the existing mortgage: $425,000 – $300,000 = $125,000. In this case, the borrower's equity line of credit limit would be $125,000.
Factors That Influence Your Credit Limit
While the mathematical formula is straightforward, several external factors can influence the final number a lender offers:
- Credit Score: Higher scores often unlock higher LTV ratios (up to 90% in some cases) and lower interest rates.
- Debt-to-Income (DTI) Ratio: Lenders evaluate your monthly income against your existing debts to ensure you can manage potential HELOC payments.
- Appraisal Accuracy: The "Value" in the calculation is determined by a professional appraisal, not necessarily what you believe the home is worth or what Zillow suggests.
- Property Type: Primary residences usually qualify for higher credit limits than investment properties or second homes.