Try This HELOC & Home Equity Loan Calculator to See Which is Right for You

If you need some cash on hand to improve your home, consolidate debt or pay for college, you may be considering either a home equity loan or a home equity line of credit.

At Addition Financial, we work with our members every day to help them get the money they need to meet their goals. One of the questions we hear a lot is:

“Is there a HELOC calculator I can use to see if a home equity line of credit is right for me?”

The good news is that calculating your home equity is a simple thing to do. Once you have that number, you can estimate how much you will be able to borrow and decide whether a HELOC or home equity loan is right for you.

What is Home Equity?

If you’re a first-time homeowner or you’ve never considered a HELOC before, you might not understand what home equity is – so, let’s start there.

Home equity can be expressed as a dollar amount or a percentage representing the amount of your home that you own outright. The reverse figure (the percentage of your home that you don’t own) is your loan-to-value ratio or LTV.

Your equity in your home is what a lender will use for collateral if you take out a home equity loan or a HELOC. In other words, the equity secures the loan and minimizes the lender’s risk.

How to Calculate Home Equity

Calculating home equity is simple. You will need three pieces of information:

1. A current appraisal of your home’s market value.
2. The outstanding balance of your mortgage.
3. The total of any other liens against your home, including second mortgages, loans, construction liens, tax liens and legal judgments.

To help you understand, let’s look at an example. You own a home that is currently appraised at $500,000. You made a 20% down payment on it and borrowed $400,000. You’ve owned the home for a while and your current loan balance is $350,000. Here’s what the calculation of your LTV would look like.

• $350,000 (loan balance) / $500,000 (current appraisal) = 70%

An LTV of 70% translates to home equity of 30%. You could also calculate your home equity by taking the dollar amount of your equity and dividing it by the home’s current appraised value, like this:

• $150,000 (home equity) / $500,000 (current appraisal) = 30%

If you had a $10,000 construction lien on your home, you would need to add that amount to your loan balance. Your home equity would then be $140,000 / $500,000 or 28%. Any time you use your home as collateral or someone files a lien to protect their financial interests, it impacts the amount of home equity that you can borrow against.

We’ve made calculating your home equity easy with this HELOC calculator.

Differences Between a Home Equity Loan and a HELOC

To make an informed decision about whether a home equity loan or a HELOC is right for you, you’ll need to understand the differences between them. Here are the most important things you need to know:

• HELOCs have adjustable interest rates. Adjustable rates are typically based on an index plus a margin. For example, Addition Financial HELOCs are based on the prime rate.
• Home equity loans typically have a fixed rate, meaning that you will pay the same interest rate for the entire term of your loan. That makes home equity loans predictable but it also means that you won’t be able to take advantage of reductions in rates the way you would with a HELOC.
• With a HELOC, you can withdraw the money you want when you need it. You aren’t required to withdraw money and you can withdraw, repay, and withdraw again.
• With a home equity loan, you will receive a one time, lump-sum payment. There can be no additional withdrawals without completing a new loan application.
• HELOCs typically require interest-only payments within the borrowing term. You are not required to pay back any of the principal until the end of the draw period unless you want to borrow additional funds*.
  
  At Addition Financial, our HELOCs feature a 20-year draw period and a 15-year repayment period. And, if you do draw funds, your minimum monthly payments will be applied to interest first, and then to the principal balance.
• With a home equity loan, you’ll be required to make monthly payments that include interest immediately after you receive your lump-sum payment.
• You can repay what you have borrowed from a HELOC at any time and borrow funds again up to your credit limit.

To sum up, HELOCs offer more flexibility than home equity loans because you’ll pay only for what you borrow and you can pay down your credit line and re-borrow if you need to.

Can You Qualify for a HELOC or Home Equity Loan?

If you’ve already used our home equity loan calculator, you know how much equity you have in your home. What you may not know is whether you can qualify for a HELOC. Here are the baseline requirements:

1. A minimum of 20% equity in your home based on a current appraisal.
2. A debt-to-income ratio below 43%. You can calculate your DTI by totaling your monthly debt obligations, including your mortgage, car payment, credit card payments, and any other debts, and dividing it by your gross monthly income.
3. A credit score of at least 620. (This score is considered fair to good – in other words, you don’t need to have excellent credit to qualify.)
4. A payment history that shows you make payments on time.

Your payment history accounts for 35% of your FICO score but lenders may put additional weight on your payment history to ensure you’ll be able to make regular payments on your HELOC or loan. On-time payments are the best predictor of your creditworthiness and thus, a lender’s top concern.

What Can You Use HELOC and Home Equity Funds For?

Another common question we hear from Addition Financial members has to do with the uses of home equity-secured funds. There’s some confusion around that topic with some people assuming they must use HELOC funds for home improvements.

The most important thing you need to know is that HELOC and home equity loan funds may be used for any expense or financial goal. You can use money from your loan to:

• Pay for home renovations or home improvements
• Buy a car or recreational vehicle
• Pay for a college education for one or more of your children
• Consolidate your debt
• Pay for a family vacation
• Buy furniture
• Buy new technology, including computers, smartphones and tablets

A lot of our members use their home equity borrowing to consolidate debts where the interest rate on their existing debt is higher than the rate for a HELOC or home equity loan. A HELOC may also be more affordable than a student loan or a home improvement loan.

Should You Apply for a HELOC or a Home Equity Loan?

Applying for a HELOC or a home equity loan is a big decision. There are some circumstances where you might need a large lump-sum payment, but if that’s not the case, then a home equity line of credit might be your best option.

Here are the benefits of a HELOC as we see them:

• HELOCs offer significantly more flexibility than home equity loans. You can choose when to borrow and how much to borrow and you’ll pay only for what you borrow.
• Likewise, HELOCs offer you the option of repaying what you have borrowed and borrowing again at any time during the borrowing period. For Addition Financial HELOCs, the borrowing period is 20 years and the repayment period is 15 years.
• Money from a HELOC can be used for any expense you have or any goal you want to reach. There are no limits on how you can use the money.
• The interest from your HELOC may be tax deductible depending on how you use it.
• The qualifications for a HELOC are flexible and you don’t need to have excellent credit to be approved. That’s because the equity in your home serves as collateral, reducing our risk as a lender.

HELOCs offer flexibility that home equity loans don’t and a line of credit is the only lending option where you can borrow what you need and pay only for what you borrow. For many of our Addition Financial members, a HELOC offers them an affordable way to get the money they need to meet life’s challenges.

If you have at least 20% equity in your home and meet the other requirements for a HELOC, then you may be able to get the money you need to consolidate your debt or pay other expenses. Use our free HELOC calculator to determine how much equity you have.

Apply for an Addition Financial HELOC using our online application.

*Addition Financial does not offer Interest Only Payments on HELOCs. For more information about opening a HELOC, Home Equity Line of Credit, with Addition Financial visit Additionfi.com/heloc.