Understanding Your HELOC (Home Equity Line of Credit)
A Home Equity Line of Credit (HELOC) is a revolving credit line that uses your home as collateral. Unlike a standard home equity loan, which provides a lump sum, a HELOC works more like a credit card with a limit based on the equity you've built in your property.
How is a HELOC Calculated?
Lenders typically determine your credit limit using the Combined Loan-to-Value (CLTV) ratio. Most lenders allow a CLTV of 80% to 90%. To find your available HELOC amount, lenders follow this formula:
(Home Value × CLTV Limit %) – Existing Mortgage Balance = Maximum HELOC
Real-World Example:
Suppose your home is appraised at $400,000 and you still owe $250,000 on your primary mortgage. If your bank allows an 85% CLTV:
Total borrowing power: $400,000 × 0.85 = $340,000
Subtract current mortgage: $340,000 – $250,000 = $90,000
Your HELOC Limit: $90,000
Draw Period vs. Repayment Period
HELOCs generally have two distinct phases:
Draw Period: Usually 5 to 10 years. During this time, you can spend up to your limit and often make interest-only payments.
Repayment Period: Usually 10 to 20 years. You can no longer withdraw funds, and you must pay back both the principal and interest.
Factors That Affect Your HELOC Approval
Credit Score: Higher scores (720+) usually unlock the best interest rates and higher CLTV limits.
Debt-to-Income (DTI) Ratio: Lenders want to ensure you have enough monthly income to cover the new credit line payments.
Appraised Value: Professional appraisals may differ from online estimates, affecting your actual equity.
function calculateHELOC() {
var homeValue = parseFloat(document.getElementById("homeValue").value);
var mortgageBalance = parseFloat(document.getElementById("mortgageBalance").value);
var cltvLimit = parseFloat(document.getElementById("cltvLimit").value);
var resultBox = document.getElementById("helocResultBox");
var amountDisplay = document.getElementById("helocAmount");
var explanationDisplay = document.getElementById("helocExplanation");
if (isNaN(homeValue) || isNaN(mortgageBalance) || isNaN(cltvLimit)) {
alert("Please enter valid numbers for all fields.");
return;
}
// Calculation Logic
var totalBorrowingPower = homeValue * (cltvLimit / 100);
var availableHELOC = totalBorrowingPower – mortgageBalance;
// Formatting for display
if (availableHELOC < 0) {
amountDisplay.innerHTML = "$0.00";
explanationDisplay.innerHTML = "Based on the " + cltvLimit + "% CLTV limit, your current mortgage balance exceeds the allowable borrowing power. You may need more equity or a higher CLTV limit to qualify.";
} else {
amountDisplay.innerHTML = "$" + availableHELOC.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
explanationDisplay.innerHTML = "This represents the maximum line of credit based on a " + cltvLimit + "% CLTV. Actual approval depends on credit score and income verification.";
}
resultBox.style.display = "block";
}