What is a Home Equity Line of Credit?

What is a Home Equity Line of Credit?

A home equity line of credit (HELOC) is a type of loan that allows you to borrow money against the equity in your home. Equity is the difference between the value of your home and the amount you owe on your mortgage. With a HELOC, you can borrow money as needed up to a certain limit, and you only pay interest on the money you use.

How Much Equity Do I Have in My Home?

There are two ways to figure out how much equity you have in your home:

  1. Appraised value minus the outstanding mortgage balance.
    For example, let’s say you bought a home 10 years ago and the remaining balance of your mortgage is $150,000. You have an appraisal completed on your home to determine its current market value. The appraisal value of your home comes back at $325,000. Your available equity is $175,000.

    Special note: Even though your available equity is $175,000, your maximum HELOC limit will be less than this amount. That’s because most lenders will only provide a HELOC up to a maximum of 80% of the current market or appraised value.
  1. Loan-to-value ratio (LTV).
    You can also calculate the equity in your home using the loan-to-value ratio (LTV). The LTV is an active way of determining how much of your home’s value is financed by debt. To calculate the LTV, divide the outstanding balance of your mortgage by the appraised value of your home.

It’s worth noting that equity can fluctuate over time based on changes in the market value of your home and the repayment of your mortgage. Regularly assessing your home’s equity can help you make informed decisions about refinancing, borrowing against your home, or selling it in the future.

3 Benefits of a HELOC.

  1. Lower Risk Loan. A HELOC is one of the lowest-risk loans available on the market because it is secured by the available equity in your home. As a result, the interest rate charged for a HELOC is significantly less than rates for other loan types.
  2. Interest Rates. HELOCs typically have lower interest rates than other types of loans because they are secured by your home.
  3. Tax Benefits. The interest you pay on a HELOC may be tax-deductible if you are using the funds to improve the property on which the loan is taken.**

Bottom Line.

Your HELOC utilizes your current home as collateral for the loan at typically more attractive interest rates. They’re best for longer-term projects in which you’ll need flexibility to borrow additional funds as you go and repay over time.