How to Use This Calculator
- Estimate Payments: Enter your used credit line and rate to see interest-only vs. principal payments.
- Check Borrowing Power: Input your home value and mortgage balance to find your maximum credit limit.
- Evaluate LTV: Toggle between 80% and 90% LTV to see how lender requirements change your limit.
Key HELOC Terms
- Draw Period: The phase where you can withdraw money and pay interest only.
- Repayment Period: The phase where you pay back both principal and interest.
- LTV Ratio: Loan-to-Value; the percentage of your home’s value lenders are willing to secure.
The first calculator above is designed to compute the monthly payments and costs of a HELOC loan. The second calculator estimates how much a borrower may qualify for based on the home’s value, the outstanding mortgage balance, and the loan-to-value (LTV) ratio acceptable to lenders.
What is a HELOC?
A Home Equity Line of Credit (HELOC) is a revolving line of credit secured by your home. It enables homeowners to borrow money using the equity in their homes. Unlike a conventional loan, the borrower does not take a lump sum upfront but withdraws money as needed, similar to a credit card.
The life of a HELOC is split into two distinct periods:
- Draw period: The first phase (typically 5 to 10 years). You can withdraw funds up to the credit limit. Most lenders only require interest payments on the outstanding balance during this period.
- Repayment period: After the draw period ends (typically 10 to 20 years). You can no longer withdraw funds. Monthly payments include both principal and interest, similar to a conventional mortgage.
Since a HELOC is revolving credit, its interest rate often varies over time, calculated from an index plus a margin. This introduces uncertainty for the borrower compared to fixed-rate loans.
Qualification and LTV Limits
Lenders usually set the borrowing limit at 80% or 85% of the home’s value minus the existing mortgage balance. For example, if a home is valued at $500,000 and the mortgage is $210,000, an 80% LTV ratio would allow a credit line of $190,000.
Other Eligibility Factors:
- Credit Score: Applicants with a score below 630 may not qualify.
- Debt-to-Income (DTI): Lenders typically avoid DTI ratios higher than 43% to 50%.
- Property Condition: House insurance, existing liens, and maintenance status also impact approval.
Costs Associated with a HELOC
A HELOC involves two main cost categories: upfront closing costs and ongoing maintenance costs.
- Upfront Costs: Origination fees, appraisal fees, and title searches can amount to 1-5% of the loan amount.
- Ongoing Costs: Annual fees to keep the account open, maintenance fees, or transaction fees for withdrawals.
Usage and Alternatives
A HELOC offers flexibility for ongoing costs like tuition or remodeling. However, the variable rate and the “payment shock” of moving from interest-only to principal-and-interest payments should be carefully planned for.
Alternatives:
Home Equity Loan: A lump-sum installment loan with a fixed rate and predictable payments. Use our Home Equity Loan Calculator to compare.
Cash-out Refinance: Replaces your primary mortgage with a larger loan. This is ideal if current market rates are lower than your existing mortgage rate.
HELOC Frequently Asked Questions
How is a HELOC different from a Home Equity Loan?
A HELOC is a revolving line of credit (borrow as you go) with variable rates, while a Home Equity Loan is a lump-sum payment with a fixed interest rate and fixed monthly payments.
What is the typical LTV ratio for a HELOC?
Most lenders offer between 80% and 85% LTV. Some credit unions may go up to 90%, but this usually requires a higher credit score and may come with a higher interest rate.
Can my HELOC interest rate change?
Yes, HELOCs almost always have variable interest rates tied to a benchmark like the U.S. Prime Rate. If the benchmark rises, your monthly interest-only payments will increase.