This calculator enables homeowners to estimate how large of a credit line they may qualify for given the appraised value of their home & any outstanding mortgage debt they have against the property. Various lenders allow borrowers to qualify for different Loan-to-Value (LTV) ratios. Lenders which allow borrowers to tap a higher percent of their home's value typically charge higher rates of interest to protect against the risk of default.
Prior to the passage of the Tax Cuts and Jobs Act (TCJA) of 2017 homeowners could deduct up from their income taxes interest on up to $100,000 in second mortgage debt. This option is still available provided the debt was used to significantly build or improve the home. Homeowners can also deduct interest on up to $750,000 of first mortgage debt.
Credit Line Qualification Calculator
Current 30 YR Fixed Mortgage Rates
The following table highlights locally available current mortgage rates. By default 30-year purchase loans are displayed. Clicking on the refinance button switches loans to refinance. Other loan adjustment options including price, down payment, home location, credit score, term & ARM options are available for selection in the filters area at the top of the table.
Home Equity Qualification
Understanding the different options in mortgage refinancing can allow you to make better financial decisions. Using the equity earned in your home could qualify you for affordable financing, provided a few other things line-up well for you, too.
Three Ways to Leverage Equity
There are three ways homeowners will typically use their earned equity in borrowing scenarios: 1) a home equity line of credit (HELOC), 2) a home equity loan (HEL), or 3) a cash-out refinance.
While each lending product will differ and offer unique benefits and challenges for each specific instance, there are some basic guidelines shared between all three, including:
- The property must be appraised
- The proper loan-to-value ratio must be met as per the lender’s requirement
- The borrower must have a solid credit score (over 700 preferred)
- The borrower has a low debt-to-income ratio (under 50%), and shows a good income stream and an ability to repay
Note as well, that when you leverage equity for loan collateral, you are using your house as the guarantee against default. It means, if you fail to hold-up your end of the bargain, they can foreclose on your home.
LTV and CLTV
Among the first things a lender will consider when reviewing your options, is the LTV, or loan-to-value ratio. The LTV ratio is a simple equation, where you divide the remaining mortgage amount by the property’s appraised value.
So if you still owed $150,000 on a home appraised for $500,000, you’d get 150,000÷500,000 =0.3, or a 30% LTV ratio.
The LTV will be key in deciding the specifics of all fixed-rate equity-based mortgages. The borrower is ideally approaching this situation with a lower LTV, as many lenders will offer their lowest interest rates to those with an LTV of 80% or less.
If a borrower has an LTV of more than 80%, they may still receive loan offers but the rates will incrementally increase. For applicants with over 80% LTV, they will generally have to have immaculate credit ratings, cash on hand, a strong history and/or other attractive traits to allow the lender to overlook and work with the risk levels connected to a high LTV.
Lenders will also use the LTV to determine if the application falls within the parameters of their lending profiles for other, differently structured equity lending vehicles, like a HELOC.
To understand how a lender considers a borrower’s eligibility for a HELOC, you must add the amount of the loan desired (and/or any additional mortgage balances) to the amount of the loan balance and divide that sum by the appraised value to reach the combined loan-to-value ratio (CLTV).
Using our example, if we wanted to borrow $90,000, we’d add it to $150,000 and our result when divided by the appraised $500,000 is .48, or 48% CLTV. 90,000 + 150,000 ÷ 500,000 = .48
Likewise, if you had a second mortgage or other lien on the property it would be figured in the same type of CLTV calculation. If your second mortgage in the example was of $50,000, the math for the CLTV would look like this: (50,000 + 90,000 + 150,000) ÷ 500,000= .58 or 58% CLTV.
In equity-based financing, lenders will typically want a borrower to retain 10-20% of their home’s earned equity as a security measure against risk.
Continuing our example, if the lender wanted 15% equity maintained, we would compute that value and add it to the loan balance(s). 15% of 500,000=75,000. So the adjusted equation to reach the CLTV would be: (75,000+50,000+90,000+150,000) ÷ 500,000 = .73, or 73% CLTV.
Another factor lenders will consider strongly is the credit score of the applicant. The lender wants to see a low-risk customer to approve, so generally they want a FICO score of 700 or better for most competitive rates. The higher, the better.
If your credit score is less than that, say in the 650-699 range, you will still likely find offers, but the rates are going to increase to protect the lender’s risks. When your credit score is less than 630, lenders may consider you too much of a risk for this type of financing and use the FICO as the sole reason to reject the application.
Debt-to-income (DTI) Ratio
In addition to having a clean credit history, lenders want to see a debt-to-income ratio (DTI) of 50% or less. This means, you owe less than 50% of your monthly earnings to pay-off monthly obligations.
In reviewing this information, lenders will consider everything for which you are legally responsible every month, including (but not limited to): mortgage payments, insurance, taxes, liens, homeowner’s association dues, and more.
Like a credit score, a DTI will tend to fluctuate over time. Earning more money will help, as will reducing or consolidating debts and associated monthly obligations.
There are numerous ways for consumers to improve low credit scores or re-balance a lopsided DTI…both being smart moves to help increase the quality and quantity of equity-based financing offers. Improving your own situation will increase and diversify lender participation.
Comparing Your Options
Once you know you can qualify for equity borrowing, you probably want to compare the main differences between a HEL and a HELOC to see which makes a better fit for your situation.
Remind yourself as well, that your home is used as collateral, so DEFAULT = FORECLOSURE.
Criteria to review includes details already mentioned about LTV and creditworthiness, as well as:
- when you plan to complete the loan payments;
- your existing mortgage’s current interest rate (and where it is going);
- whether you prefer fixed or flexible terms.
A home equity loan will typically be a fixed rate loan for its lifespan. As with any loan, a HEL will include closing costs and associated fees to factor in. The borrower receives a lump sum payment at closing.
A HELOC has many more flexible aspects to its structure, being a credit line secured by your home. You will have a “draw” period (usually 10 years on a 15-year HELOC), where you are able to access your funds as needed and have the option to pay only interest on what you draw, not what is available to you.
Draw only as needed from the HELOC, then the balance is repaid during the last five years. In many ways a HELOC is acting almost like a credit card that uses your home as collateral.
A HELOC’s interest rates for the draw period are typically variable, with a lender-margin fixed to the prime rate. The interest rate may become fixed during the repayment period, depending on your deal. There is an acknowledged risk over overspending during the draw period, which would cause larger payments of principal-plus-interest during the repayment period.
You want to be aware of caps on your interest rate and how they will apply to a HELOC. A lifetime cap is the highest the interest rate could ever be, and a periodic cap refers to how much a rate can increase during a specified time period. Both of these numbers are crucial to understand to get your best deal on a HELOC.
While those are the basic, essential elements of a HELOC’s structure, how the lender presents the deal to the borrower will be dependent on a lot of market-driven and applicant realities.
As competition has increased for the borrower’s attention, lenders are now offering hybrids that will take the best attributes from both lending types (HEL and HELOC) and tailor solutions for each borrower.
Comparing the basics in a simple table can help zero-in on what is most important to you:
|Loan Type||Home equity loan (HEL)||Home equity line of credit (HELOC)|
|funds as needed||x|
|lump sum payout||x|
|options to pay interest-only||x|
|pay interest on only amount drawn||x|
|risk of overspending||x|
|risk of property value falling||x||x|
What About Taxes on Equity Financing?
Changes to the tax codes in 2017 have impacted equity finance.
As of early 2018, the interest paid on many forms of equity financing is still tax deductible as in the past – but since the changes, you now must use the loan to build, buy or substantially improve your home. This new wrinkle in the tax law applies to all forms of equity financing.
What it means for today’s borrower, is if you use a HELOC or a HEL or other equity-based financing for home repairs or to buy or build a home, you can likely deduct all the interest paid. If you use your proceeds to pay for anything else, like a medical expense or a vacation, you will not get the tax break from equity financing, as was true in the past.
For more specifics on how this form of funding will directly impact your tax returns, please consult with your own professional tax representative. The IRS website also offers specific information pertaining to home equity financing as well as the Tax Reform and its impact in general.
Boiling It All Down
Ultimately, deciding on whether to use equity financing is going to come down to your individual situation, goals, and the available offers.
You also want to look closely at what your current interest rate is – for if, as an example, it was originated in 2013-2014 when there were record low rates in the market, you would save more by keeping it there than refinancing at a now higher rate.
A HELOC will be impacted by changing interest rates but can be less money to get into initially. A HEL offers stability and a steady rate for its lumpsum payout but can prove to be riskier if property values fall over time. The tax benefits for either option look at how it will be spent.
To sum up the basics:
- With proper LTV, you can likely leverage equity. Most people will compare a HEL and a HELOC, though they are no longer locked into one or the other as the only option.
- If your credit score or DTI is off the mark, fix them by paying down debt, consolidating bills, and/or earning more money. Better personal scores equal better deals offered.
- Consider your need, and its monetary impact (taxes, etc.) – how you will spend it, matters.
- Consider your timeline – how long you plan to be in the home.
- Consider the stability of your income – if you see it being shaky during the life of the loan, it may not be a wise decision to move forward with equity finance.
- Compare your options to all other available lending products that could answer your need(s).