A home equity line of credit or HELOC is a revolving line of credit secured by your home. It generally has a lower rate of interest than a personal or unsecured line of credit. The combination of your existing mortgage and your HELOC can not exceed 80% of your home’s value.
Calculating your home’s equity is simple. Begin by multiplying your most recent appraised value by 80%, and then subtract your existing mortgage balance. This will let you know how much equity you currently have to work with. For example, say your home is valued at $700,000.00, and your existing mortgage balance is $400,000.00, it will allow you to qualify up to a maximum of $160,000.00.
Though HELOC rates are generally lower it is not a never ending source of money. A HELOC is for revolving credit; interest is calculated daily at a variable rate which is relative to the prime rate. HELOC rates are generally higher than traditional mortgages rates.
On a monthly basis you are responsible for paying the interest on your outstanding balance of your home equity line of credit. With a traditional mortgage you make interest and principal payments and pay your balance off over time. HELOC holders must be more disciplined and make balance payments at their own discretion.