Significant expenses come up. You may want to plan a vacation, invest in home improvements, or buy a new car, but your bank account may not support those plans. You could rack up credit card debt, but who wants to do that when interest rates are sky-high?
Homeowners can obtain funds for the next big-ticket purchase through a home equity line of credit. The amount you can borrow will depend on several factors. Our home equity line of credit calculator will reveal how much you can get from the bank. In addition, we’ll cover the pros and cons of a HELOC, cash-out refinances and everything else you should know about this financing option.
What is a Home Equity Line of Credit (HELOC)?
A home equity line of credit is a loan tied to your home’s equity. Not all HELOCs have fixed interest rates, meaning your monthly payments can increase due to interest rate hikes. You can use these funds as necessary. Your home equity increases each time you make a monthly mortgage payment, adding more to your line of credit. You won’t get charged interest for unused funds.
What are the Benefits of Home Equity Loans and Home Equity Lines of Credit (HELOCs)?
Easy Access to Cash
Home equity loans and home equity lines of credit (HELOCs) can be a great way to access cash. These options are often attractive because they enable homeowners to leverage the equity in their homes to obtain financing.
Flexible
HELOCs offer more flexibility because you can borrow as much or as little as you need at any given time. Plus, you can use the funds for just about anything, including paying for major expenses such as home improvements, debt consolidation or college tuition.
Lower Interest Rates
Interest rates on these loans may be lower than other loan types, making them an even more attractive option for many borrowers. By using the equity you have already built up in your home, you may be able to borrow money at a lower interest rate than if you were to secure an unsecured loan or use a credit card.
Potential Tax-deductible Interest
The interest paid on these loans may be tax deductible (check with your local tax advisor for specifics).
Extended Draw and Repayment Periods
HELOCs have lengthy draw periods, allowing you to access the funds for a longer period of time. Additionally, repayment terms can go beyond 10 years in some cases.
Are There Any Drawbacks?
It’s obvious why people take out a HELOC. They want extra funds for a new purchase or to help with expenses. However, a home equity line of credit can hurt your finances if you’re not careful. Keep these cons in mind so you can safely take out a HELOC.
They Are an Additional Debt
Extra debts add up and become more difficult to pay off. A home equity line of credit can strain your budget and lead to challenging decisions. Only take out a HELOC for a critical purchase instead of “fun money” or speculative investments.
Harder to Qualify For
Lenders will look at several factors to determine if you qualify for a HELOC. You’ll have more debt now than you had before buying a house. The extra debt will hurt your debt-to-income ratio and make it more challenging to obtain a home equity line of credit.
Since your house is collateral, you’ll fare better with this loan than a personal loan or credit card debt. However, it’s no walk in the park to acquire a home equity line of credit.
Monthly Payments, Fees, and Interest
You’ll have to pay back the HELOC each month. Some people who fall behind take out another HELOC or refinance. These strategies increase how much you’ll owe over time. You’ll also have to pay fees for using a HELOC. Ask your lender about their fees so you don’t get hit with any surprises. Only take out as much money as you can comfortably pay back.
Fixed Terms
You’ll have to pay back the HELOC under a fixed term, usually 10-20 years. This term limit is shorter than most mortgages. Shorter fixed terms increase monthly payments.
How Do You Calculate Your Home Equity Line of Credit (HELOC)?
A home equity line of credit calculator can give you an idea of how much equity you can take out of your home. Several factors determine how much money sits in your HELOC.
Determine Your Home’s Value
A HELOC taps into your home’s equity. Determining your home’s value helps you determine your HELOC. You can get an appraiser to assess your home or look at the most recent appraisal available. Inflation, upgrades, and other components raise the value of your home over time. A new appraisal can increase your home’s value and open up more funds.
Deduct the Amount You Owe
After determining your home’s value, subtract the amount you owe. For example, if your home is worth $500,000 and you owe $400,000, you end up with $100,000. This difference represents your home equity.
Calculate Your Loan-to-Value Ratio
The loan-to-value ratio measures the percentage of your home’s appraised value that relies on debt. For instance, if your home is worth $800,000 and you owe $200,000, your loan-to-value ratio is 25%.
Many lenders impose a loan-to-value ratio limit for HELOCs. If a lender has an 80% loan-to-value limit for the previous example, you can’t owe more than $640,000 for your home ($800k * 80% = $640k).
What is Your Credit Score and Annual Income
Lenders will assess an applicant’s financial health when approving HELOC applications. A high credit score and reliable annual income will increase your chances of obtaining a home equity line of credit. On the other hand, you may still get a HELOC with a low credit score, but you’ll pay a higher interest rate.
Understanding HELOC Calculators
Instead of calculating how much equity you can possibly access through a HELOC on your own, you can use a calculator to crunch the numbers for you.
What is a HELOC Calculator?
A HELOC calculator helps you estimate the amount you can borrow using a home equity line of credit (HELOC). It considers several various factors, including your current home value and your outstanding mortgage balance. The calculator then provides you with an idea of how much you could be eligible to borrow, along with the estimated interest rate, monthly payment and loan term.
The Benefits of Using a HELOC Calculator
There are several key advantages of using a HELOC calculator:
- It provides an estimate of how much home equity you can borrow.
- It allows you to get a feel for how much your monthly payments will be during both the draw period and the repayment period.
- It makes it easier for you to compare the costs and benefits of a HELOC with other loan options, like a home equity loan or refinance.
- It allows you to prepare your budget better and ensure you’re able to manage your financial commitments.
Key Elements of A Home Equity Line of Credit Calculator
Below is a closer look at the vital components of a HELOC calculator.
Interest Rates
Generally, HELOCs come with variable or fixed interest rates. Variable rates will fluctuate periodically, which can lead to increased monthly payments. However, fixed-rate loans remain the same for the duration of the loan term, giving borrowers predictable monthly payments.
Loan Term
The loan term is usually divided into two parts. The draw period typically lasts for 5 to 10 years. During this time, you can withdraw funds up to your approved loan amount, often making interest-only payments (or paying the monthly interest ) on the outstanding balance. The repayment period usually spans around 10 to 20 years. Over the course of this defined period, you will make both principal and interest payments.
Home Value and Current Mortgage
The amount you can borrow through a HELOC is generally a percentage of the difference between your home’s value and your outstanding mortgage balance. As previously mentioned, the difference is referred to as your home’s equity.
How to Use a Home Equity Line of Credit Calculator
These interactive calculators, which are readily available online for independent use, are relatively simple to use.
Step-by-step Guide to Using a HELOC Calculator
When you’re ready to get a feel for your borrowing power, here’s how to move forward:
- Enter your home’s value: Begin by inputting your home’s current estimated value. The accuracy of your HELOC calculation significantly depends on what you enter here.
- Input the outstanding balance: You’ll need to provide the amount you still owe on your mortgage. This is crucial as it affects your loan-to-value (LTV) ratio.
- Determine desired loan amount: Decide the total line of credit you want to access. Some calculators have a maximum limit, so ensure the amount you enter is within the allowable range.
- Choose a payment option: HELOCs offer interest-only payments or principal and interest loan payments. Select the option that suits your financial situation.
- Factor in interest rates: Some calculators let you choose between a fixed or variable-rate loan. Variable rates fluctuate over time, while fixed rates remain constant.
- Include closing costs: Enter any closing costs, such as appraisal fees or points, to get a more accurate calculation.
Factors Affecting Your HELOC Calculation
Several factors influence the outcome of a HELOC calculation:
- Home value: Higher home values typically result in larger lines of credit.
- Outstanding mortgage balance: The larger your outstanding loan balance, the less credit you’ll likely be eligible for.
- Credit score: A higher credit score often leads to a lower interest rate and decreased borrowing costs.
- Debt-to-income (DTI) ratio: Lenders use this ratio to assess your ability to repay what you borrow, and lower DTI ratios can increase your approval odds.
- Closing costs: Adding these expenses to your calculation can provide a more accurate representation of the total cost of the loan.
Example Calculation: HELOC Calculator in Action
To better understand how a HELOC calculator works, here’s a step-by-step illustration:
- Input your home’s value.
- Enter the amount you owe on your mortgage.
- Input the loan-to-value ratio limit.
- Enter the draw period and repayment period.
(*Note: The fields may vary by the HELOC calculator you select)
Once you’ve entered this information, the HELOC calculator will estimate your borrowing power.
How Much Could You Borrow with a HELOC?
Lenders typically let you access up to 80% of a home’s value for your HELOC. If your home is worth $500,000, your current debt and HELOC can max out at $400,000.
If you still owe $300,0000 on the mortgage, you can take out a HELOC up to $100,000. Your credit score and income will impact a lender’s maximum LTV ratio, interest rates, and acceptance.
