What is a HELOC?
A Home Equity Line of Credit (HELOC) is an open-ended loan taken out against the equity in your home. The size of the HELOC you qualify for depends on several factors, including:
- Your credit rating.
- The amount of equity you have in your home.
- The percentage of your home's value the lender is willing to lend.
The percentage of your home's value the lender is willing to lend out is often referred to as the lender's Loan to Value (LTV) ratio.
How is Your Line of Credit Limit Determined?
To calculate your HELOC, you first need to find out what the lender's LTV ratio is.
You then multiply the value of your home by the LTV ratio -- which gives you the maximum loan amount on your home.
Next, total up all mortgages and liens against your home and subtract that total from the lender's maximum loan amount. The result is the HELOC you may qualify for.
How Does a HELOC Work?
Typically, once you take out a HELOC, you will be required to make minimum monthly payments on the borrowed funds, equal to the amount of interest being charged per month. Any amounts you pay over and above the minimum payment will serve to lower the principal balance owed.
Most equity line of credit loans are set up to close after ten years, meaning the lender will expect all borrowed funds to be paid back at that time.
If you would like to calculate your home's current LTV ratio, please visit the Loan to Value Calculator.