This line of credit coincides with the value of your home. Moreover, the higher the value of your home is, the bigger your line of credit is too. This calculator is to help you gauge how much you can borrow with a home equity line of credit, based on the value of your property and current mortgage balance.
What is a HELOC?
A HELOC is the combining of a credit card and a home equity loan. This type of credit gives you a borrowing limit like a credit card. You have complete access to use the line or credit or not at all. Like a credit card, you have to make monthly payments as you utilize the credit, and pay interest as well. Regarding interest rates for a home equity line of credit, it compromises the prime rate or other benchmark interest rate.
Contrary to a credit card, your home’s equity is the foundation of your home equity line of credit. If you don’t make on-time payments, the bank has the right to go after your home to receive payment. Since banks consider this line of credit as clean debt, the interest rates you can get are much lower. They are even significantly lower than most credit card interest rates.
HELOC Rates – How Does It Work?
A home equity line of credit is a type of ARM (adjustable rate mortgage), unlike other mortgages. Moreover, there are two components to a HELOC: a set base rate (“margin”) and a fluctuating rate (“index”). In addition to, the lender of a home equity line of credit calculates your payments based on the margin, index, and current balance.
Furthermore, lenders use your credit score and the worth of your home as the basis of the margin of a home equity line of credit.
Once you obtain a HELOC lender, they run your credit report from the major bureaus: Equifax, TransUnion, and Experian. Once they complete this, they combine them as one report. The report consists of your credit history and scores from each bureau.
Even though most lenders pick the average of the three scores, some take a conservative approach and use the lowest of the three scores. Here’s the rule: the higher your credit score, the lower your home equity line of credit margin will be. Negative information on your credit report increases the base rate (margin). Some people even lose their HELOC because of negative remarks on their credit report.
Furthermore, you calculate your home equity by dividing the total amount of your outstanding loans by your the value of your home. Typically, lenders don’t like to see you loan amount exceed 90% of the value of your home. Remember, the lower your percentage is, the lower your base rate is also and vice versa.
What's The Maximum You Can Borrow?
The borrowing capacity of a home equity line of credit relies on the value of your home and any outstanding balances on the mortgages you have for your home. Every lender has different guidelines they follow — 75% LTV (total loan to value). Some may even have offer lines of credit that have a 90% total loan to value. take a 75% total LTV into consideration. If the total value of your home is $200,000 and you owe $100,000 on your mortgage, you the have the option to obtain a HELOC with a $50,000 credit line.
Furthermore, whether or not you qualify for a HELOC is contingent upon your credit history, the market value of your home, outstanding mortgage balance, and other considerations as well. Monthly payments vary on a monthly basis on a HELOC because of a change in the interest rate. Overall, make sure to use this HELOC calculator to get estimate your borrowing capacity. This calculator is subject to underwriting guidelines which include limits on the maximum LTV.
Getting a HELOC is a great way to pay for college, home improvement projects, and other things such as medical expenses. Keep in mind that this type of borrowing isn’t for everyone. Always consider the good and the bad before signing up to receive a HELOC.
Advantages and Disadvantages Of HELOC
Here are a list of pros and cons of a home equity line of credit for new investors. With your property as collateral, a lender gives a line of credit thats against the equity of your home, giving you the opportunity to access the money when necessary through a credit card or a checkbook.
This is a totally different process than dealing with a mortgage, where you can get a loan at a fixed-rate interest that’s repayable on a monthly basis.
Home Equity Line Of Credit: Pros
You have the liberty to use your money how you want to with a HELOC. Moreover, you, as a homeowner, may not even have to draw from this line of credit. It’s comforting for many homeowners to know that it’s there just in case of emergencies, such as needing pay for your kid’s tuition.
If nothing out of the usual comes up, they have the choice to not use the line of credit at all. Just like a credit card, if you use it, you have to pay the monthly balance including interest.
On the contrary, a home equity loan has less flexibility in comparison to a home equity line of credit. A HELOC is totally dependent upon your equity. Remember, your house stills serves as collateral; you just have the option to withdraw the funds on an at-need basis.
This is very useful when you are only expecting a need that may or may not follow through such as a business investment.
The main advantage of a home equity line of credit is that they have low-interest rates. In comparison to personal loans, the interest rate for a home equity loan is significantly lower.
In addition to, HELOCs are significantly lower than cash advance finance charges too. The banks see it as a secured loan because your house is the collateral.
Also, remember that you are taking a risk with a home equity line of credit. If you use your home as collateral, the bank has the to foreclose on your house if you default on your loan. Weigh all the risks before you sign the agreement.
Home Equity Line Of Credit: Cons
Besides your property is at risk, your monthly payments build on top of each other. Contrary to credit lines, equity loans require monthly payments. Moreover, this means that your monthly amount adds up until you catch up on your payments.
For instance, if you add the factors of $200 or $300 more to your current installment and possible foreclosure, the debt can become a heavy burden.
The lenders implement a lien against your property in order to lock you in a HELOC, which is the same concept your mortgage lender used.
Overall, this means that you are at a huge risk of losing your home if you don't make your payments on time. For example, if you lose your job, you're at risk to not making your payments on time due to a lack of income. Furthermore, this can pose a serious problem.
Equity Value Decrease
Consider your home as an investment venture in addition to where you live. Moreover, by borrowing more than the equity amount, the net worth of your assets decreases.
The impact is that if you attempt to sell your house, you have to pay back two loans. As a result, you end up having less money in your pocket. Keep in mind that if there are any additional monthly payments of principal and interest, it's unlikely that you'll pay off your first loan swiftly.
The main factor that makes HELOCs like mortgage and not credit cards is that you have to pay closing costs. Just like mortgages, HELOC's include the application, a title surcharge, attorneys’ and appraisers’ fees, and “points” according to the Federal Trades Commission.
Do you remember the term “points” from your mortgage?
Points are a percentage of the amount you borrow. Right from the start, your lender presents is to you this information. Here's an important thing to know for those of you are looking into a home equity loan or a HELOC: The closing costs are rolled up into the APR the lender quotes to for the straight loan. On top of that, the bank requires you to pay the closing costs and the APR on a HELOC. In conclusion, you can compare the two annual percentage rates.
This form of borrowing is quite appealing if you understand are the pros and cons of a home equity line of credit. Remember, there is a risk factor. Furthermore, the housing collapse following the credit situation tells us that borrowing requires you to make prestige calculations on the benefits and risk factor.
Above all, make sure that the deal you sign up for fits your needs perfectly. Lenders who offer HELOCs very depending on the lender. As a result, it's very important to look around first before making a decision.