A Home Equity Line of Credit (HELOC) is a revolving line of credit that uses your home as collateral. Unlike a traditional second mortgage, a HELOC allows you to borrow against your equity as needed, up to a specific limit.
Lenders determine your credit limit based on the "Combined Loan-to-Value" (CLTV) ratio. This represents the total amount of debt secured by your home (including your first mortgage) compared to the home's total value. Most lenders limit the CLTV to 80% or 85% to ensure there is enough equity remaining to protect the loan.
The HELOC Formula
To find your maximum potential line of credit, use the following logic:
Step 1: Multiply your home's current market value by the lender's maximum allowable CLTV ratio (e.g., 0.80).
Step 2: Subtract your existing mortgage balance from that number.
Step 3: The remaining amount is your estimated credit limit.
Example Calculation
Imagine your home is valued at $450,000 and you still owe $250,000 on your primary mortgage. If a lender allows a maximum CLTV of 80%:
$450,000 x 0.80 = $360,000 (Maximum total debt allowed)
$360,000 – $250,000 = $110,000 (HELOC Limit)
Factors That Influence Your HELOC Approval
While equity is the primary driver, lenders also look at several other factors during the application process:
Credit Score: A higher score usually unlocks better borrowing limits and lower margins.
Debt-to-Income (DTI) Ratio: Lenders verify that your monthly income can support both your current mortgage and the potential HELOC payments.
Appraisal: The "Estimated Market Value" used in the calculator must be verified by a professional appraiser.
function calculateHELOC() {
var homeValue = parseFloat(document.getElementById("homeValue").value);
var mortgageBalance = parseFloat(document.getElementById("mortgageBalance").value);
var ltvRatio = parseFloat(document.getElementById("ltvRatio").value);
var resultBox = document.getElementById("resultBox");
var helocOutput = document.getElementById("helocOutput");
var helocExplanation = document.getElementById("helocExplanation");
if (isNaN(homeValue) || isNaN(mortgageBalance) || isNaN(ltvRatio)) {
alert("Please enter valid numbers for all fields.");
return;
}
// Calculation Logic
// Step 1: Calculate the maximum allowable total debt
var maxTotalDebt = homeValue * (ltvRatio / 100);
// Step 2: Subtract current mortgage
var rawLimit = maxTotalDebt – mortgageBalance;
// Logic for negative equity or no limit
var finalLimit = rawLimit > 0 ? rawLimit : 0;
// Formatting for currency
var formattedLimit = new Intl.NumberFormat('en-US', {
style: 'currency',
currency: 'USD',
maximumFractionDigits: 0
}).format(finalLimit);
var formattedMaxDebt = new Intl.NumberFormat('en-US', {
style: 'currency',
currency: 'USD',
maximumFractionDigits: 0
}).format(maxTotalDebt);
// Display Results
resultBox.style.display = "block";
helocOutput.innerHTML = "Estimated HELOC Limit: " + formattedLimit;
if (finalLimit > 0) {
helocExplanation.innerHTML = "Based on a " + ltvRatio + "% CLTV ratio, your total allowable debt is " + formattedMaxDebt + ". After subtracting your existing mortgage, you have " + formattedLimit + " available in equity.";
} else {
helocExplanation.innerHTML = "Your current mortgage balance exceeds the maximum allowable debt ratio for this home value. You may not currently qualify for a HELOC based on these figures.";
}
}