How to Calculate Your Home Equity Line of Credit

Homeownership can change your life in many positive ways—including giving you a way to build home equity. 

What’s home equity? 

Think of it this way: Your home is likely to be the most expensive purchase you will ever make. It will be your most valuable asset. Finding ways to access your home's value (or “tap the equity”) offers many advantages.

One of the most versatile tools for accessing the value of your home is a home equity line of credit (HELOC). A HELOC lets you use your home equity as rolling credit, giving you access to cash when needed, much like a credit card.

What is a home equity line of credit (HELOC)?

As the name implies, a home equity line of credit is a line of credit granted against your home's value. 

That can sound complicated—but it’s simpler than you think. 

Let’s look at an example.

How does a home equity line of credit work?

Let's say you have a home valued at $500,000, and your existing home loan is for $300,000. The equity in your home is the difference between these two numbers. In this case, that’s $200,000 ($500,000 - $300,000 = $200,000). 

When you apply for a HELOC, credit unions such as iQ consider the combined loan-to-value ratio. This ratio includes both your current home loan and the potential HELOC amount. For example, if a credit union allows you to borrow up to 90% of your home's value, the total of your existing loan and the HELOC cannot exceed this limit. 

In our example, 90% of your home's value is $450,000 (90% of $500,000). Since you already have a $300,000 loan, the maximum additional amount you can borrow through a HELOC would be the difference, which is $150,000 ($450,000 - $300,000). 

What can you use a HELOC for?

You can use a HELOC for a variety of things:

• Since the interest rate is usually lower than most credit cards or loans, it’s ideal for debt consolidation. 
• You can use it to pay for remodeling projects to increase the value of your home. 
• A HELOC can be used for big-ticket items, such as a vacation home or unexpected expenses.

With a HELOC, you usually have a higher credit limit than you would with a credit card, depending on the amount of home equity available.

Interest rates for a HELOC can also be fixed or variable. An iQ HELOC, for example, has a variable rate, although you can lock in portions with a fixed rate. You only pay interest on the amount of the line of credit you use.

Are there any downsides to HELOCs?

HELOCs can present some challenges. Many HELOCs have associated fees; some require a minimum credit line amount. You also need to pay on time to protect your credit rating, and you risk losing your home if you fail to make your payments. Your team at iQ can help you assess your situation to help you avoid these challenges and use your HELOC to reach your financial goals.

How do you calculate your home’s equity?

Calculating your home’s equity is based on a simple formula: 

(the value of your home) x (90% or max) - your home loan = available home equity 

However, there are other factors you need to consider when calculating your home equity. For example, how much is your outstanding home loan? If you have owned your home for some time, you have paid down your mortgage and may owe less on your home than the original loan, which means you have more home equity available.

Your credit score is another factor. Qualifying for a HELOC is like qualifying for any other type of loan, so the better your credit score, the more likely you are to qualify and the better the terms of the HELOC.

You also need to consider the current market value of your home—not the value of your home when you bought it. Housing values historically increase yearly, so your home is likely worth more than when you bought it. 

Calculating your outstanding home loan against the current value of your home is called the loan-to-value (LTV) ratio. If your LTV ratio is high, then you are considered high-risk.

You can use your LTV ratio to calculate your available home equity. (HELOC calculators can also help!)

Want to access your home's value? iQ can help you with a HELOC.

Looking for a HELOC, wondering what your HELOC payment would be, or what could you do with this type of equity? 

The home equity loan experts at iQ can assist you. iQ’s mission is to partner with members to help them achieve their financial goals, including finding the right tools to make the most of home equity.

If you want to learn more about home equity and home loans, an excellent place to start is our guide to homebuying and financing, Mortgages 101.