HELOC (Home Equity Line of Credit) Calculator
What is a HELOC?
A Home Equity Line of Credit (HELOC) is a revolving credit facility 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 works more like a credit card with a set limit. You can draw funds as needed, pay them back, and draw them again during the "draw period," which typically lasts 10 years.
How is a HELOC Calculated?
Lenders determine your credit limit based on your Combined Loan-to-Value (CLTV) ratio. Most lenders allow a maximum CLTV of 80% to 90%, though this depends on your credit score and debt-to-income ratio. The formula used is:
(Home Value × Max LTV Percentage) – Current Mortgage Balance = HELOC Limit
Suppose your home is valued at $500,000 and your lender allows up to 85% LTV. You still owe $300,000 on your primary mortgage.
1. Max Borrowing Capacity: $500,000 × 0.85 = $425,000
2. Minus Existing Debt: $425,000 – $300,000 = $125,000
In this scenario, your maximum HELOC limit would be $125,000.
Why Use a HELOC?
HELOCs are popular for large, ongoing expenses because they offer lower interest rates than credit cards or personal loans. Common uses include:
- Home Renovations: Increasing the value of the asset securing the loan.
- Debt Consolidation: Paying off high-interest credit cards with a lower-interest line of credit.
- Emergency Fund: Having a line of credit available for unexpected medical bills or repairs.
- Education Expenses: Funding college tuition with flexible withdrawal options.
Key Considerations
While HELOCs offer flexibility, remember that your home serves as collateral. If you fail to make payments, you risk foreclosure. Additionally, most HELOCs have variable interest rates, meaning your monthly payments can fluctuate based on market conditions after the draw period ends and the repayment period begins.