How Much Equity Can I Borrow From My Home?

When you borrow against your home’s equity, you’ll use one of the three main borrowing options: home equity loans, home equity lines of credit and cash-out refinance loans. You secure a home equity loan or line of credit using your home as collateral. How much you can borrow from your home depends on your house’s worth, your chosen lender’s terms and any fees that increase your loan’s total amount.

What’s equity in a home?

Home equity is the dollar amount of your home’s worth after subtracting what you still owe on your home loan. As you pay your mortgage, your equity may increase — assuming your home’s value remains constant or doesn’t drop. Equity may also grow when there’s a boost in the housing market, increasing the value of your home.

There’s more than one way to build equity in a home. For instance, you can make additional payments toward the principal on your mortgage if you can afford it. Home improvement projects like redoing floors, painting or adding new kitchen appliances can also increase the value of your house.

How much can I get for a home equity loan? Key considerations

As a general rule, most lenders allow you to borrow 80% to 85% of your home’s equity. Ultimately, though, how much equity you have in your home depends on several factors.

Your combined loan-to-value ratio

Most banks and credit unions first review the combined loan-to-value ratio (CLTV) in your home when you apply for a home equity loan or HELOC. A CLTV shows your total loan-to-value (LTV) ratio when you have multiple loans against a property. Lenders use CLTV as part of their risk assessment during loan application approvals. The lower the percentage, the lower the risk, closing costs and interest rate on the loan. Most lenders want to see a CLTV under 80% for loan approval.

You find your CLTV ratio by adding your current loan balance and the amount you wish to borrow. Then, divide that amount by the current appraised value. Finally, multiply by 100 to get a percentage. Consider the following hypothetical:

• Appraised home value: $400,000
• Current loan balance: $200,000
• Desired loan amount: $50,000
• CLTV: ($200,000 + $50,000) ÷ $400,000 = 0.625 or 62.5%

Creditworthiness and income level

In most cases, the lower your credit score, the higher your interest rate on home equity loans and lines of credit. Lower incomes may qualify for a smaller loan. Before you obtain any type of home equity product, be prepared to produce income documents, such as pay stubs or W-2s.

Individual guidelines of home equity lenders

Individual lenders have additional specifications for approving home equity products. Lenders offer different payment options, repayment terms, ways to access equity, promotions, interest rates and special discounts. With some research, you can learn more about the best home equity loans and determine which works best for you.

How to use your home equity

There are three ways to access your home equity, each with advantages and disadvantages.

Home equity loans

A home equity loan is commonly known as a second mortgage — because the lienholder of a home equity loan has a second position behind the lienholder on the first mortgage.

Like your original mortgage, home equity loans are secured by your home. That is, if you default on repaying your first or second mortgage, the issuing bank can foreclose on the home. This process typically requires auctioning the home, with the lienholders getting first right to the proceeds in order of lien position.

When you choose a home equity loan, you request a certain amount you want to borrow and receive that money in a lump sum. Once you receive your loan, you can’t access any additional equity without taking out an entirely new loan. Home equity loans are ideal when you need a large sum to pay for a significant expense, such as major home renovations or debt consolidation.

Home equity loans come with the benefit of a fixed interest rate. These loans are also fully amortized, meaning your monthly payment goes toward interest and principal.

Home equity lines of credit

Home equity lines of credit (HELOC) function much like credit cards. You’re approved for a specified amount (a line of credit) and can draw against the line of credit on an as-needed basis. Similar to standard credit cards, interest only accrues on the outstanding balance that carries over from month to month. Be careful, though, as many HELOCs have variable interest rates, so a low initial rate may not stay that way.

A HELOC is ideal if you need to access money as needed and over an extended period.

Cash-out refinance loans

A cash-out refinance is a new mortgage that allows you to take equity out of your home by replacing your current loan with a larger one. The proceeds of the new loan are used to pay off the old one, and you get the amount left over in a lump sum payment.

The money you receive once the loan closes can be used to make home repairs, pay off medical expenses or consolidate higher-interest debts like credit cards.

If you are considering a cash-out refinance, remember that your loan terms, including the interest rate, monthly payment and duration, will change. Depending on the new terms, you may be making higher monthly payments for a longer period of time compared to your original loan.

There are also closing costs, application fees and other costs associated with any type of refinance, including a cash-out. Evaluate the costs of refinancing versus the amount you’ll receive to see if it’s the best option for you.

Cash-out refinances are ideal for those with enough equity to receive a cash payout. With a cash-out refinance, your interest rate is locked in, so there is certainty about your monthly payments throughout the loan.

The benefits of borrowing against home equity

Some of the benefits of borrowing against home equity include:

• Lower interest rates: Home equity loan and HELOC rates are typically lower than credit card rates.

• Tax benefits: You may be able to deduct the interest paid on a home equity loan or HELOC from your taxes if the money is used to buy, build, renovate or improve your primary property.

• Save on refinancing fees: The closing costs associated with home equity loans and HELOCs are typically lower than those on a primary mortgage.

The drawbacks of borrowing against home equity

As you consider home equity loan products, closely consider the drawbacks before you make the final decision:

• Home serves as collateral: When borrowing money through a home equity product, your home is the collateral. Defaulting may mean you lose your home.

• Difficult to qualify with low credit: Getting a home equity loan or HELOC with poor credit is possible, but it will be more difficult to qualify, and you’ll likely pay more to borrow.

• Closing costs: Lenders may charge fees for a home equity loan or line of credit for things like appraisal, application fee, title search, loan preparation and filing, taxes, and property and title insurance.

Summary of Money’s How much equity can I borrow from my home?

Remember to evaluate the advantages and risks when ready to get a home equity loan. You may qualify for tax breaks using an equity loan to make home improvements. But, you could lose your home if you default on repayments. Consider your combined loan-to-value ratio, credit score and income when shopping for lenders. Doing so helps you determine the best way to tap into your home’s equity.