HELOC Overview
A home equity line of credit is a loan you can get from your bank or mortgage provider. HELOCs allow you to borrow against the accrued equity value in your home. They are secured loans, which means they are backed by your house, which acts as the loan’s collateral. Our HELOC calculator can help you figure out how much you can borrow.
Getting a HELOC is effectively taking out a second mortgage. You apply for a HELOC with your lender and are approved for a maximum amount. From there, you can draw on your home line of credit as you see fit. HELOCs give you access to a pool of capital not available to renters or people who don’t own homes.
HELOC Terms to Know
Every loan structure has its unique set of terms to understand. Here are several terms unique to taking out a home equity line of credit:
- Market Value: The current market value of your home is one of the first variables used to calculate how much you can borrow with a HELOC. Your home’s market value is the amount a prospective buyer would pay for your house. You can estimate this by looking at comparable houses in your neighborhood that have recently sold, referring to a recent home appraisal, or exploring estimated market values on sites like Zillow or Redfin.
- Outstanding Mortgage: Your outstanding mortgage is the mortgage you have left until you pay off your home. You can calculate this by taking the purchase price of your home and subtracting your down payment and total mortgage payments throughout the life of the mortgage. Alternatively, you can quickly find this on your mortgage balance statement provided by your bank, credit union, or mortgage lender.
- Home Equity: Your home equity is the difference between your home's purchase price minus your outstanding mortgage plus the difference between your purchase price and the current estimated market value.
- Loan-to-Value (LTV): Most lenders place a cap on LTVs of 85%. The highest LTVs differ by lender, property type, and creditworthiness. LTV is your total accrued home equity multiplied by the lender's cap, usually 85%. Lenders don't lend for the total amount of your home equity because they want a buffer in case the value of your house decreases.
Smart Tip:
Most HELOC lenders require borrowers to have a credit score of at least 620 or above. If you need to improve your credit score, here are steps to boost your credit score quickly.
HELOC Calculator
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HELOC Calculator
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What Can HELOCs Funds Be Used For?
Like with most loans, HELOCs can be used to fund various near-term cash needs. The great thing about HELOCs is that they are a line of credit, so you can pick and choose when and how much to use.
Because HELOCs are flexible with what you can spend your money on, they cover a wide range of small, medium, and large bills. Here are a few examples:
- Home Renovations
- Remodeling Expenses
- Medical Bills
- Educations Costs
- Debt Consolidation
- Medical Bills
How to Reduce Your Mortgage Balance
There are a couple of levers to pull that will increase what you can borrow with a HELOC.
While you cannot control the market value of your home, you can affect how much of your mortgage balance you can pay off. Here are some ways to reduce your mortgage balance quickly:
- Make a Large Principal Payment
- Round Up Your Monthly Payments
- Earn More Income
If you struggle to make your mortgage payments, you can explore recasting or refinancing your mortgage to make it more affordable.
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Alternatives of a HELOC
HELOCs are not the only game in town. There are plenty of other credit products you can take advantage of if you haven’t purchased your first house or don’t want to put your home at risk.
Here are several other credit products to consider if you need access to cash quickly:
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Smart Summary
HELOCs are a line of credit against your home's accrued equity value. These lines of credit are backed by the value of your home and offer you access to a pool of capital only available to homeowners. HELOC funds can be used to fund large purchases, such as home renovations, education costs, debt consolidation, or even vacations. There are risks with taking out a HELOC because you put your home at risk of being repossessed by the bank, but they give millions of homeowners access to secured loans.
