Calculating the Value of a Home Equity Line of Credit (HELOC)
How is the value of a HELOC calculated?
The value of a home equity line of credit (HELOC) is determined by the home equity and the lenders acceptable level of combined loan to value (CLTV). The home equity has to be large enough to cover the requested loan, and the CLTV has to be at a sustainable level.
For example, a home that is valued at $450,000 with a mortgage of $300,000 will have home equity valued at $150,000 ($450,000-$300,000). In this scenario, the borrower will be using the $150,000 as collateral for a loan. It is very risky for lenders to give you a loan that totals $150,000, so they will use the potential total debt (first and second mortgage) and the value of the property to give them the combined loan to value ratio (CLTV). The CLTV determines your level of risk, which affects your rates,
Most lenders limit the CLTV to 90%. So In The example above the lender would allow a total debt of $405,000 (90% of $450,000) to be attached to the property. Therefore, the maximum home equity loan that can be drawn is $105,000 ($405,000-$300,000).