This tool estimates how large of a credit line against your home equity you may qualify for, for up to four lender Loan-to-Value (LTV) ratios.
What is your creditworthiness?
Based on your current financial situation, what kind of loans and mortgages will you be approved for?
Even if you pay your bills on time religiously and you have an enviable credit score, you can't borrow as much money as you want.
The easiest way for a homeowner to obtain a large loan is a home equity line of credit (HELOC). It’s a type of open-ended loan, in which your home serves as the collateral.
With a HELOC, you will be approved for a certain amount based on your current rating, the amount of equity in your home, and the percentage of your home's appraised value (LTV ratio) that the lender is offering to lend you. Many lenders will set the ceiling on your HELOC by taking the LTV ratio and subtracting what you still owe on your mortgage.
Your home is probably the most valuable possession you own, and a HELOC could put it into jeopardy, so you should only use a HELOC for major expenses, such as home improvement, education, and medical emergencies. HELOCs are not your personal piggy bank.
First, let's see how the calculator works.
For a simple check of how much credit you have stashed away in your home, let's put the current appraised value of your home at $650,000, and we’ll say that you still owe $225,000 on your mortgage. The loan-to-value ratio is determined by your lender, and it's one of the most important factors in determining the amount of additional money you can borrow against your home.
The LTV ratio, expressed as a percentage, varies from lender to lender, but 75% is about average. Furthermore, the higher the lender's LTV limit, the more credit you will qualify for.
Entering this information into the appropriate fields of the calculator yields some interesting results. When we use the national average of a 75% LTV, this translates into a $262,500 line of credit. But if you were to find a lender offering an 85% LTV, you would be able to borrow $327,500 on that same HELOC.
Whether you’re taking a three-month cruise, financing your son’s education, buying a ridiculously large TV, or paying off some nagging credit card debt, you can get a HELOC or home equity loan for whatever you want. But the wisest way to spend the money is on home improvements that can increase the value of the home serving as your collateral. Then you're more likely to qualify for a loan if you're forced to refinance. If you use the home equity money to upgrade your property, you're doing the right thing.
However, be forewarned if you're planning to get a line of credit based on your principal residence merely as a safety net. If you have no plans to withdraw a specific amount of money, make sure your lender is made aware. Many of them set minimum withdrawal amounts to make it worth their while.
While a home equity loan is a lump sum loan you obtain using your home as collateral, a HELOC is more like a credit card account with a predetermined maximum that you have access to over a period of time called the "draw period."
A home equity loan is often referred to as a second mortgage because if your house goes into foreclosure, the primary mortgage lender is first in line to get paid from the proceeds of your home’s sale - the secondary lender gets whatever is left. As a result, the home equity lender must charge higher interest rates than the primary lender. If it's any consolation, those increased interest rates are still considerably lower than your credit card.
The two differ when it comes to interest rates. The interest rate on a HELOC is most often variable, and it is closely tied to the prime rate (as reported in the Wall Street Journal). Often, these are as high as credit card rates.
If you use the windfall to improve your house, all of the interest you pay is tax deductible up to $1 million with both home equity loans and HELOCs. And be sure to inquire about the alternative minimum tax. If it applies, you can only deduct your home equity or HELOC money if it's used to purchase or upgrade a home. However, in most cases, you can deduct up to $100,000 of the money if used for a different purpose.
Lenders have an "out" when the value of your home drops significantly, or when a fundamental change in your financial situation leads your lender to doubt your ability to keep up with the payments (for example, you lose your job or your breadwinning spouse).
If this happens, you have two options. You can either try and work things out with your lender, perhaps providing documentation showing that your home has retained its value, or you can shop around for another lender. Remember that this will incur duplicate charges because you'll have to repay many of the application and appraisal fees.
If you're in the market for credit, a home equity plan is just one of the many options you should explore. Make sure to weigh the costs of a HELOC against its benefits. Without putting your assets in jeopardy, shop around until you find the terms that suit your situation.
If you decide to apply for a HELOC, read the agreement carefully and pay special attention to the terms, annual percentage rate (APR), and the cost of setting up the plan.
It's best to familiarize yourself with the terminology of home equity credit lines before you use our calculator and start shopping for a lender. Here are the basics: