A HELOC, or Home Equity Line of Credit, is a type of mortgage that allows customers to borrow against some of their home equity. Generally, home equity refers to the portion of your home that you really own.
If you have been making your mortgage payments, especially in housing markets where the home value has been skyrocketing, you have probably built good home equity. You can easily access it through a credit line. This article will guide you on how to determine what you can borrow and calculate your HELOC payment.
Calculating your Home Equity
You can calculate your home equity using a HELOC calculator. The first step involves calculating your current home value. You can do this by searching your current home address on renowned real estate websites like Zillow, which will give you a rough estimate. Take the amount and deduct your outstanding mortgage balance plus all loans you have secured with your home, such as a home equity loan. This will give you a rough estimate of your equity.
How to Use this Calculator?
- You will require three crucial pieces of information to use this calculator. These include:
- The value of your current home
- Your outstanding mortgage balances, among other loans secured by your home
- Your FICO credit score
The calculator gives you a clear idea of the maximum amount you can borrow through a HELOC. It also shows the client’s latest LTV (Loan to Value) ratio, which lenders use to determine how much more your clients can borrow against their homes.
Typically, most lenders prefer a LTV of 80% and below. However, some tend to hit up to 90%. Clients with low home equity and credit rates are not eligible for home equity loans.
Sure the HELOC calculator tool can effectively determine how much you can borrow. However, you also need to discuss with your lender to get the most accurate information based on a more extensive range of information.
How are HELOC Payments Calculated?
Unlike home loans, where you receive a large amount upfront and gradually clear it over time, HELOCs are some sort of credit line you can tap into whenever necessary. HELOCs have two periods, including:
Draw Period: During this period, a customer only pays interest on the amount of credit used. The period lasts 10-15 years.
Repayment Period: Once the draw period is over, a client should start making payments on the remaining balance plus interest. The period can last up to 20 years.
Your HELOC monthly payments can vary based on various factors, including:
Your Interest Rate
Generally, home equity line of credit has varying rates, which can increase or decrease based on the current interest rate. Your interest rate will depend on various factors, including your equity, credit score and how much you can borrow, according to the HELOC calculator.
You will find some HELOCs with relatively low introductory interest rates allowing you to start with low payments. However, you should ensure that you are financially capable of handling significant payments down the road.
The adjustable interest rates are associated with two significant parameters. They include the lifetime cap, one of the highest interest you could pay and the periodic cap. The periodic cap refers to how often your home equity loan interest rates can change. Each of these factors can significantly impact your monthly loan payments.
The Age of your Loan
If you are within your home equity draw period, you will have to make your payments against the interest. In other words, your payments could be relatively lower than what you would have paid during the repayment period.
Now that you understand how to determine what you can borrow and calculate your HELOC payment, you can start shopping around for HELOC lenders. While you can use the loan for virtually any expense, most people use them to renovate or repair their homes. You can also use it to clear off your student debt, debt consolidation, and medical debts, among others.