Sometimes, you need extra cash to do a major home improvement project or pay off a large expense. Homeowners can tap into a money stream that’s readily available through a Home Equity Line of Credit, or HELOC.
A HELOC calculator helps homeowners determine how much they’re eligible to borrow against their home based on the home’s current market value, their outstanding mortgage balance, and the lender’s allowable loan-to-value ratio, or LTV.
Here’s a closer look at how a HELOC calculator estimates how much you’re allowed to borrow against your home equity.
4 Numbers to Know for Calculating Your HELOC Amount
To use a HELOC calculator, there are a few numbers and concepts you need to understand to have a full picture of what your HELOC looks like. These include your home value, mortgage balance, credit score, and more. Let’s dive into the 4 numbers you need to understand when calculating your HELOC amount.
1. Home Equity
Home equity is the difference between your home’s current market value and the amount owed on it.
Your home’s equity is the difference between the value of your home and your mortgage balance. For instance, let’s say your home is worth $300,000 and you’ve paid $60,00 toward your mortgage balance. That $60k is your home equity. It’s the portion of the home’s current value that you–the homeowner–own outright. The less money you owe on your home mortgage payment, the more your equity will grow.
Your home equity also changes as market values fluctuate. As your home value increases, so does your equity. If your home value decreases, your equity may also – if the value is dropping faster than you are paying down your mortgage balance.
Home equity is the difference between your home’s current market value and the amount owed on it. The more home equity you have, the better – as you can leverage it through home equity loans and HELOCs.
2. Mortgage Balance
The money you owe on your home, plays a lead role in determining your home equity.
As a homeowner, you likely already know that your mortgage balance is the full amount owed at any time throughout the duration of your mortgage. As we mentioned above, your home equity is determined by deducting your mortgage balance from your home’s current market value.
Paying down your mortgage is done through monthly payments. The monthly payment pays down the principal balance and interest. In other words, with each mortgage payment, you’re reducing the amount you owe on the principal, which helps you build equity.
Your mortgage, or the money you owe on your home, plays a lead role in determining your home equity and your estimated HELOC line amount and rates.
3. Loan-to-Value Ratio
Lenders want to see lower LTVs, as it signifies a lower risk in lending.
Your Loan-to-Value Ratio, or LTV, describes the amount you can borrow compared to the value of the property securing the loan. To find this number, expressed as a percentage, you’ll divide your mortgage loan balance (i.e. what you still owe on your mortgage) by your property’s current market value. This gives lenders an idea of the risk involved in lending to you. For instance, a home purchased for $400,000 with a $300,000 mortgage results in a LTV ratio of 75%.
Lenders want to see lower LTVs, as it signifies a lower risk in lending. When using a HELOC calculator, the LTV ratio gives lenders an idea of the maximum amount you can borrow based on your home’s value.
4. Credit Score
Your credit score is one of the most important numbers in your financial life. A credit score is a 3-digit number, falling on a scale from 300 to 850, which summarizes your credit history and represents your financial track record. It’s basically a report card for how you’ve handled finances in the past – and it will inform potential lenders on the risks of lending to you in the future.
A healthy credit score is a key aspect of a healthy financial life.
There are many factors that go into determining your credit score. Your payment history, credit inquiries, and the percentage of credit limit used all play a role. Generally, a credit score at or above 740 is considered very good or exceptional, while a score below 670 is considered poor. Scores at or above 670 are generally considered good. Your credit score is a major factor in determining your eligibility for any type of loan or credit line, especially a HELOC.
A healthy credit score is a key aspect of a healthy financial life – and will play an influential role in your ability to secure a HELOC.
Using a HELOC Calculator to Estimate Your Line of Credit
Once you’ve got these numbers figured out, you can start calculating your estimated HELOC amount. A HELOC calculator helps determine the amount you can borrow with a Home Equity Line of Credit, which typically ranges anywhere from $10,000 to $300,000.
Keep in mind that lenders typically won’t let you tap into your home equity if you owe more than 80% of what your home is worth.
You’ll likely be able to access up to 80% of your home’s value minus your current loan balance, so keep this in mind during the calculation process.
Here’s an example:
Let’s say your home is worth $400,000, and you owe $100,000 on your mortgage balance. Your lender says you can borrow up to 80% of your home’s value – which in this case is $320,000 Subtract that $100k you owe on your mortgage and you’ve got your estimated maximum HELOC line amount. Here’s a visual chart to help break it down.
Paying Off Your HELOC
Once the lender approves your HELOC, you can tap into your total credit line amount by borrowing as needed. Much like a credit card, you can use the HELOC when you need it and pay off the balance monthly (with interest). HELOC interest rates are usually variable, but you can also talk to your lender about the option of a fixed-rate. HELOCs are typically split into two terms – the draw period and the repayment period – for monthly payments.
During the draw period, which typically lasts up to 10 years, you can access your line of credit as needed while making flexible monthly payments. While you have the option to only pay back the interest on what you’ve borrowed, it’s best to pay both the interest and a portion of the principal balance each month so you aren’t overwhelmed with a larger payment during the repayment period.
During the repayment period, which typically lasts anywhere from 10 to 20 years, you’ll have to pay back both interest and the principal balance and you’ll no longer be able to borrow from your HELOC. That means your average monthly payment may be larger than your typical payments during the draw period since you have to include the principal balance. That’s why many lenders recommend paying more than the minimum amount during the draw period to avoid payment shock later on.
Should You Choose a HELOC?
A HELOC is a good idea for homeowners with a healthy financial history as HELOCs typically come with lower interest rates than credit cards or personal loans– and solid credit history will help keep that rate down.
When talking to a lender about a HELOC, it’s good to go in with a baseline knowledge of where you stand in terms of your home value, mortgage balance, LTV, and credit score. While lenders can guide you on which types of loans and lines of credit are best for your situation, using a HELOC calculator gives you a head start in making the best decision for your financial life.
All HELOCs are underwritten and issued by BBVA USA. BBVA and BBVA Compass are trade names of BBVA USA, a member of the BBVA Group. BBVA USA, Member FDIC, and an Equal Housing Lender. NMLS #402936
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