How Do I Calculate a Home Equity Line of Credit?

Maybe you’ve got a really worthwhile project in mind like a college education or advanced degree. The big problem is finding out a way to pay for it. A home equity line of credit, or HELOC, can be a lifesaver. As with a conventional home loan, you tap into the accumulated equity in your home. But a HELOC works like a credit card -- you borrow only what you need, as you need it. Before you rush down to your bank to open a HELOC, you need to calculate how much you can borrow to ensure that you have enough equity built up to meet your needs.

Step 1

Arrange to have your home appraised. The size of a home equity line of credit depends on the current market value of your home. Some lenders will perform a computerized appraisal for you. If a full appraisal is required, expect to pay the appraisal fee. Before you have an appraisal done, check with the lender. You may be able to select your own appraiser or you may have to use one approved by the lender.

Step 2

Discuss the terms and conditions of the HELOC with the lender. Lenders set a maximum percentage of a home’s appraised value and won’t lend more; typically this is 75 to 80 percent of the appraised value. For example, if a lender allows 80 percent of appraised value and the market value of your home is $250,000, the maximum you can borrow will be $200,000. Lenders set their own limits, and a few will lend 100 percent or more of a home’s appraised value.

Step 3

Subtract the outstanding balance of any mortgage(s) you have on your home from the maximum amount the lender will allow you to borrow. For example, if the borrowing limit is $200,000 and you already have a $150,000 loan, this leaves a potential HELOC of $50,000.

Step 4

Do not assume your HELOC credit limit will be set at the maximum. Lenders review your credit record, income and existing debts. If there is doubt about your ability to pay, you may be turned down or offered a HELOC with a smaller credit limit.

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