March 31, 2023

Home Equity Line of Credit (HELOC) Calculator: How to Calculate HELOC & What it Means

What is Home Equity Line of Credit (HELOC) and calculate how much you may be able to borrow

Calculate how much you may be eligible to borrow using HELOC


What is a Home Equity Line of Credit?

A Home Equity Line of Credit (HELOC) is a type of revolving loan that allows homeowners to borrow against the equity in their home. This type of loan is secured by the borrower's property and is often used to finance major expenses such as home renovations, college tuition, or debt consolidation.

How do HELOCs Work?

HELOCs work similarly to credit cards, in that they have a credit limit and borrowers can draw on the line of credit as needed. The borrower is only required to pay interest on the amount of the line of credit that has been used, and payments are typically interest-only during the draw period, which is usually 10 years.

During the draw period, the borrower can make withdrawals and repayments as needed, up to the credit limit. Once the draw period ends, the repayment period begins, and the borrower is required to pay back the full amount of the loan, which can be done over 10-20 years.

How to Calculate How Much I May Be Eligible to Borrow?

The calculator above uses home value, outstanding balance, Loan-to-Value ratio, and credit score to estimate the amount of credit that is available through a HELOC.

The formula for estimating the amount of credit eligible to borrow, given an LTV of at most 80% and credit score greater than 620, is:

Eligible to Borrow = Home Value * 80% - Outstanding Balance

The maximum amount that a borrower can borrow through a HELOC is dependent on several factors, including but not limited to:

  • The Lender's Policies
  • Loan-to-value (LTV) ratio: Lenders look for an LTV of around 85% of the home's appraised value minus the outstanding mortgage balance.
  • Credit Score: Generally, a score of 640 or higher is recommended for approval. However, to get the best interest rates and terms, a credit score of 700 or higher is typically preferred.
  • Borrower's Income
  • Employment History
  • Debt-to-income Ratio

Is a HELOC the right option for me?

While a HELOC calculator can be a helpful tool, there are several factors to consider when deciding whether a HELOC is the right financial product for your specific situation.

Advantages of HELOCs:

  1. Lower interest rates: HELOCs typically have lower interest rates than other types of loans, such as credit cards or personal loans.
  2. Flexibility: HELOCs offer flexibility in terms of how much money you can borrow and when you can borrow it. Borrowers have access to a line of credit, which means they can draw on the funds as needed, and only pay interest on the amount borrowed.
  3. Tax benefits: In many cases, the interest paid on a HELOC is tax-deductible, which can provide significant savings for borrowers.
  4. Home improvement: HELOCs are often used to finance home improvement projects, which can increase the value of the home and potentially provide a return on investment.

Disadvantages of HELOCs:

  1. Risk of foreclosure: Since a HELOC is secured by the borrower's property, there is a risk of foreclosure if payments are not made on time.
  2. Fluctuating interest rates: HELOCs typically have variable interest rates, which means the interest rate and the borrower's monthly payment can fluctuate over time.
  3. Fees: HELOCs often come with fees, such as closing costs, appraisal fees, and annual fees, which can add up over time.
  4. The temptation to overspend: Since HELOCs offer flexibility and access to a large amount of credit, some borrowers may be tempted to overspend and accumulate debt.

Conclusion

A Home Equity Line of Credit (HELOC) is a type of revolving loan that allows homeowners to borrow against the equity in their home. HELOCs work similarly to credit cards, in that they have a credit limit and payments are interest-only during the draw period. The amount of credit available is determined by the borrower's credit score, income, and the amount of equity in their home.

HELOCs offer several advantages, such as lower interest rates, flexibility, and tax benefits. However, they also come with risks, such as the potential for foreclosure, fluctuating interest rates, and fees. It's important for borrowers to weigh the pros and cons of a HELOC carefully and to make sure they have a solid plan for repaying the loan.