A Home Equity Line of Credit (HELOC) is a revolving line of credit that allows you to borrow against the equity in your home. Determining how much you can borrow involves three primary factors: your home's current market value, your current mortgage balance, and the lender's maximum Loan-to-Value (LTV) ratio.
The HELOC Formula
(Home Value × Maximum LTV %) – Current Mortgage Balance = Max HELOC Amount
Example Calculation
Suppose your home is appraised at $500,000 and you still owe $300,000 on your primary mortgage. If your lender allows a maximum LTV of 80%:
Calculate 80% of value: $500,000 × 0.80 = $400,000
Subtract mortgage: $400,000 – $300,000 = $100,000
In this scenario, your maximum credit line would be $100,000.
Factors That Influence HELOC Approval
Credit Score: Higher scores typically unlock lower interest rates and higher LTV limits.
Debt-to-Income (DTI) Ratio: Lenders evaluate your ability to repay by looking at your monthly income versus monthly debt obligations.
Appraised Value: Professional appraisals determine the current market value, which may differ from your own estimate or Zillow's Zestimate.
CLTV: The Combined Loan-to-Value includes all liens against the property.
Frequently Asked Questions
What is the difference between a HELOC and a Home Equity Loan?
A HELOC works like a credit card (revolving balance), whereas a Home Equity Loan is a lump-sum payment with a fixed interest rate and fixed term.
Are HELOC interest rates fixed?
Most HELOCs have variable interest rates tied to the Prime Rate, meaning your payments may change over time.