How about some quick math? If today your house is worth $200,000 and you still have an outstanding loan of $150,000, then your home equity is $50,000.
One example of where this can be useful is when a homeowner plans to buy a new home. A HELOC can be useful in order to use equity in your current home in order to make a down payment on a new home. This allows the homeowner to purchase a new home FIRST and THEN sell. Once the home is sold, the HELOC can be paid with the proceeds of the sale.
How is this calculated? Debt expenses plus monthly housing expenses, divided by gross monthly income, multiplied by one hundred.
An example of where this can be useful is when a homeowner plans to purchase a second home or investment property and would like to used their home equity to come up with a down payment or to pay for the property in full with "cash".
Another use for this type of loan is as a way to consolidate debt. Use the cash funds to pay off multiple loans that may have higher interest and put it all in one mortgage payment.