A home equity line of credit (HELOC) is a loan against the equity (value minus debt) of your home, it is essentially a second mortgage. Through calculating the equity of your property you can borrow from a lender, up to a certain amount, using your property’s value as collateral. A HELOC can be used for loans to pay for home improvements, repairs, or a new deck.
As a real estate agent, you will get calls from homeowners that want to get a HELOC, but are looking to get an estimate of their home value to see if it makes sense. By understanding how to calculate the potential HELOC amount, you can establish yourself as an expect and help them make the best choice. You can repeat these calculations as necessary to account for changes in values.
How to Calculated a HELOC Amount
(Value of your home x percentage the bank is willing to loan) – debt owed against the property
|Example 1 Say you have a home worth $300,000. Your Bank is willing to lend out 80% of your home value. How much can I currently borrow? To find this we have to multiply $300,000 by 80%. Convert 80% to a decimal by dividing it by 100 or moving the decimal over two places to the left. This gives us: Percentage divided by 100 = decimal 80% / 100 = 0.80 Now multiply that value by the total value of your home ($300,000). Bank rate multiplied by the value of your home = dollars the bank is willing to loan 0.80 x $300,000 = $240,000 We could potentially borrow $240,000 against the equity of your home.|
|Example 2 Say you haven’t completely paid off the mortgage to your home. Say it’s only three quarters of the way to being fully paid off, meaning you still owe one quarter ($75,000). How much is the bank willing to lend now? Initial amount the bank is willing to lend – amount owed on your house = HELOC $240,000 – $75,000 = $165,000|
|Example 3 What if due to COVID 19 the bank can no longer loan out 80% of your home equity. If the bank started becoming more conservative and decided that they are only willing to lend out 70% of your home’s equity. Now we have to re-adjust. Equity of your home multiplied by the adjusted rate the bank is willing to loan = dollars the bank is willing to loan $300,000 x 0.7 = $210,000 $210,000 – $75,000 = $135,000|
|Example 4 What if due to rowdy and destructive behavior in your neighborhood your property value decreases. How much would you be able to take out against your home if your home value decreased to $290,000? Assume the bank will only loan up to 70%. $290,000 x 0.7 = $203,000 $203,000 – $75,000 = $128,000|
If you are interested in making a lot of money as a real estate agent, I would recommend reading the Millionaire Real Estate Agent by Gary Keller.
And if you are having trouble passing the math portion of your licensing exam, check out our products to help you pass the real estate math questions on the exam.