HELOC (Home Equity Line of Credit) Calculator
Understanding Your Home Equity Line of Credit (HELOC)
A Home Equity Line of Credit, or HELOC, is a revolving line of credit that allows you to borrow against the equity in your home. Unlike a traditional home equity loan, which provides a lump sum, a HELOC works more like a credit card: you have a maximum limit, and you can borrow as much or as little as you need during the "draw period."
How HELOC Limits are Calculated
Lenders use a metric called the Combined Loan-to-Value (CLTV) ratio. This ratio looks at the total of your existing mortgage balance plus your desired credit line divided by your home's appraised value. Most lenders allow for a CLTV between 80% and 90%.
The Formula:
(Home Value × Max CLTV %) – Current Mortgage Balance = Your Maximum Credit Line.
Interest-Only vs. Fully Amortized Payments
During the Draw Period (usually the first 10 years), many HELOCs allow for interest-only payments. This means your monthly bill only covers the cost of borrowing the money, not the principal itself. This keeps payments low but doesn't reduce your debt.
During the Repayment Period (usually 10 to 20 years), you can no longer draw funds, and you must pay back both the principal and the interest. This often leads to a significant "payment shock" where monthly costs increase dramatically.
Realistic Example Calculation
Suppose your home is worth $500,000 and you owe $300,000 on your mortgage. If your lender allows an 85% CLTV, your calculation would look like this:
- 85% of $500,000 = $425,000
- $425,000 – $300,000 balance = $125,000 maximum HELOC limit.
If you then draw $50,000 at an 8% interest rate, your interest-only payment would be approximately $333.33 per month.