You’ve been in your home for a while now and have built up some equity. So, you’re considering taking out a home equity line of credit (HELOC) to take care of some of life’s larger expenses. However, you’re a bit unsure of your qualifications and other HELOC details. With that in mind, here’s how to figure out how much equity you have in your home – and more.
A HELOC is fundamentally a line of credit against which you can borrow whenever you wish. You can also withdraw however much you wish, up to your available limit.
HELOCs typically have variable interest rates, meaning that, the amount of your monthly payment will vary with the interest rate and the amount of money you borrow. The latter hinges on how much equity you have. During what’s called a “draw” period, you’ll only shell out interest on what you borrow.
Note that your home will serve as loan collateral, meaning that if you default, you risk losing your home. So, it’s imperative that you are certain you will be able to make your payments before getting a HELOC.
How Much Can I Borrow?
A home equity line of credit will usually permit you to borrow up to 85 percent of your home’s value, minus any due mortgage payments.
A HELOC calculator can help you determine what your payment will likely be and calculate the amount you can borrow. Using such a tool can remove a lot of the guesswork.
Can I Use Funds as I Need Them?
It’s a key HELOC benefit: you can use funds as you need them, and only borrow what you need, when you need it. If you wind up needing less cash than you thought you might, you’ll simply have a smaller payment.
How Do I Figure Out How Much Equity I Have?
First of all, home equity is the difference between your home’s appraised value and the balance on your mortgage.
To calculate the amount of equity you have in your home, subtract the sum owed on all loans that are secured by your home from the property’s appraised value.
Now, if your house is appraised at a value that is less than the amount you owe on your mortgage, you’re what is called “under water,” meaning you would not have any equity in your home.
You can generally establish more equity, by the way, by paying down your principal and reducing your loan-to-value ratio, which compares the amount of your mortgage with the property’s appraised value. You can do this most expeditiously by regularly adding more to your required monthly mortgage payment. Do make certain your loan doesn’t have any prepayment penalties, though.
What About Repayment?
You do have flexibility here, which is another popular HELOC feature. While how loan payoff is handled depends on the lender and the sum you seek to borrow, HELOCs can be in play for up to 30 years.
During the loan’s draw period – typically the loan’s initial 10 years – all you must do is pay loan interest. Beyond that, though, you keep the flexibility, as the repayment period approaches, to also make principal payments. This will result in a lower balance.
Once the draw period is over, the outstanding balance will be turned into a principal-plus-interest loan for what is usually a 20-year repayment period.
Once you’ve figured out how much equity you have, you can use a HELOC payment calculator to calculate what your payments might be. Then you are primed for ready, affordable cash in the form of a home equity line of credit.