Simple Calculation for Determining HELOC Credit Line

[Payton Pearson]

Hey guys,

I know HELOCs are rather intimidating. It's a difficult calculation to figure out at first (at least it is/was for me! I went months without understanding how it worked), but here is a simple calculation for determining the credit line size you will have access to if you decide to open up a HELOC (home equity line of credit):

1. Determine the appraised value of your home. Let's say an appraiser tells you it's worth $200,000

2. Determine the total outstanding debt left on your mortgage. Let's say you have a $100,000 mortgage left on the property.

3. Determine the LTV (loan-to-value) you can get from your bank. This is typically between 75-80% of the APPRAISED value of the home.

4. Calculation:

(Appraised Home Value)*(LTV) - (Outstanding Mortgage Debt) = Size of credit line

So, using our example above, with a 75% LTV that the bank will give you:

($200,000)*(0.75) - ($100,000) = $50,000 credit line.

This is an ACTUAL CREDIT LINE that the bank will give you. It's very useful and very smart to open one up if you aren't upside down in your property. Just because you open up a HELOC doesn't mean you have to use it--but it's there if you need it. The other great thing about HELOCs is that they are paid back with SIMPLE interest, not amortized interest. That is, for example, if you are being charged 3% interest on a HELOC, and you use $10,000 of it, you will pay 3% on $10,000.

Now, I am still learning, so correct me if I'm wrong here, but in addition to this, HELOCs are typically open for 10 years, which means if you take a $10,000 sum out of the HELOC, you can pay it back over the course of 10 years. At 3% interest, over the course of 120 months, that means your monthly payment would be $85.83.

HELOCs are also usually acceptable down payment mechanisms.

Anyways, for the newbies out there like myself, I hope this helps with some basics about the HELOC. Summary of the above: if you can open a HELOC, it's a good idea to do so for the extra credit access.