How Much Home Equity Loan Can You Get?

Dreaming of a home renovation? Dealing with unexpected repairs? Consolidating debt? A home equity loan could be the financial solution you’re looking for. This type of loan allows you to tap into the equity you’ve built in your home, providing a lump sum you can use however you choose. But before diving in, it’s important to understand how much you can borrow and what factors you’ll need to consider.

Let’s break down the key elements that determine your borrowing limit and help you make an informed decision about taking advantage of your home’s value.

How Much Equity Can You Borrow On A Home Equity Loan? 

The answer depends on your lender, but most allow you to borrow between 80% and 85% of your home’s appraised value, minus your current mortgage balance. Some lenders may even stretch this limit to 90% of your home’s value.

Home equity loans have become a popular financing option for homeowners seeking to pay for significant home projects, such as renovations or repairs. According to First American Data and Analytics, these loans are increasingly being utilized to meet the rising demand for home improvements.

The Joint Center for Housing Studies at Harvard University states, “Annual spending for home improvements and maintenance will grow from $472 billion today to $477 billion by the third quarter of 2025.”

While you must spend the loan on home improvements for the interest to qualify as tax-deductible, you can generally use the funds for any purpose.

How To Calculate Your Home Equity Loan Limit 

As stated, you can typically borrow 80% to 85% of your home’s value, minus any remaining mortgage balance. If your house is fully paid off, the calculation becomes even easier, as there’s no mortgage to deduct. Here's how to calculate your loan limit:

1. Determine Your Home’s Value

Start by establishing your home’s current market value. Your lender will likely require a professional appraisal to confirm this number. For example, let’s assume your home is valued at $450,000.

2. Subtract Your Mortgage Balance

Next, calculate your equity by subtracting your remaining mortgage balance from your home’s appraised value. For instance:

• Home value: $450,000
• Mortgage balance: $250,000
• Equity: $450,000 - $250,000 = $200,000

3. Calculate Your Home Equity Loan Limit

Let’s say your lender allows you to borrow up to 80% of your home’s value. This is known as the loan-to-value ratio, or LTV. To calculate your maximum debt limit, you’ll multiply your home value by the LTV.

• Home value: $450,000
• LTV ratio: 80%
• Maximum debt limit: $450,000 x 80% = $360,000

Now, you’ll subtract your mortgage balance from this amount to find your available loan amount:

• Maximum debt limit: $360,000
• Mortgage balance: $250,000
• Available loan amount: $360,000 - $250,000 = $110,000

In this example, you could qualify to borrow up to $110,000, provided the lender approves your application.

4. Account for Combined Loan-to-Value (CLTV)

If you’re taking out a home equity loan on top of your mortgage, you’ll need to calculate the combined loan-to-value ratio, or CLTV. To calculate the CLTV, you’ll add your mortgage balance and home equity loan amount, then divide by the home value:

• Mortgage balance + Home equity loan: $250,000 + $110,000 = $360,000
• Home value: $450,000
• CLTV ratio: $360,000 ÷ $450,000 = 80%

If your lender allows a CLTV of 80%, this scenario would qualify you for the loan, assuming you meet all other lending criteria.

The amount you can borrow depends on the equity you’ve built in your home. Usually, the less you owe on your mortgage compared to your home’s value, the higher your potential borrowing limit. However, even with a higher mortgage balance, you may still qualify for a home equity loan. Always check your lender’s specific requirements to understand your options.

What Affects Your Maximum Home Equity Loan Amount? 

Several factors determine how much you can borrow through a home equity loan. Here are some of the top elements that will affect the potential loan amount:

Home Equity

The primary factor is your home equity, which is the difference between your property’s current market value and the remaining balance on your mortgage. In simpler terms, it’s the portion of your home that you own outright.

Your equity grows as you pay down your mortgage. Once you’ve built up enough equity, you may be able to use it as collateral to qualify for a home equity loan.

Home Value

Your home’s market value — the price a buyer would pay — plays a major role in determining your loan amount. This value fluctuates based on factors like real estate market trends and the location of your property. Changes in your home’s value affect both your equity and the maximum loan amount a lender is willing to offer.

Personal Requirements

Even with sizable equity, you must meet specific lending requirements to qualify for a loan. Common standards include:

• Credit score:
  Your credit score reflects your reliability in repaying debts. Higher scores can improve your chances of approval and better interest rates. According to ICE Mortgage Monitor, borrowers with scores of 760 or higher hold the majority of tappable equity. Most lenders require a credit score of at least 620. Rocket Mortgage requires a 680 credit score.
• Debt-to-income ratio (DTI):
  Your debt-to-income ratio, or DTI, represents the percentage of your monthly income that goes toward paying off debts. Lenders calculate your DTI to measure financial stability. A DTI of 50% or lower is typically required.
• Closing costs:
  Similar to a mortgage, home equity loans come with closing costs, which usually range from 2% to 5% of the loan amount.
• Home and title insurance:
  Homeowners insurance may be mandatory to qualify for a loan because it protects against damages from events like fire or storms. Title insurance is also common, ensuring the lender’s interest in your property is protected against issues like liens or ownership disputes.

Why You Might Want To Tap Your Equity

Before taking out a home equity loan, make sure you understand the benefits and risks so you can weigh your options.

• Low, fixed interest rates: Home equity loans typically offer lower interest rates than other financing options, and fixed rates ensure predictable monthly payments.
• Affordable monthly payments: Repayment terms ranging from 10 to 30 years keep monthly payments affordable.
• Flexibility in use: Lenders don’t usually put restrictions on how you use the funds, whether it’s consolidating high-interest debt, funding a major renovation, or starting a business.

Why You Might Not Want To Tap Your Equity

• Higher interest costs over longer terms: While longer repayment periods reduce monthly payments, they also increase total interest costs.
• Possible foreclosure: If you aren’t able to meet your loan obligations, this could result in losing your home. It’s critical to borrow only what you can comfortably repay, even during tough financial times.
• Standard lending requirements: Like other types of loans, you’ll need to meet lending requirements, and that can be challenging. You’ll typically need a credit score of 620–680, a DTI below 50%, and a stable income to qualify.

How To Maximize Your Loan Amount 

If you’re trying to qualify for a higher home equity loan amount, there are several strategies you can use to increase your chances. These steps focus on increasing your home equity, improving your financial standing, and meeting lender requirements.

1. Improve Your Credit Score

Your credit score is a significant factor when determining eligibility and loan amount. To improve your score:

• Pay bills on time: Late payments can hurt your credit score, so prioritize paying all bills before their due dates.
• Reduce credit card balances: Lowering your credit utilization ratio can have a large impact on your score.
• Avoid opening new credit accounts: Too many recent inquiries can lower your score, so limit new credit applications before applying for a home equity loan.
• Fix errors on your credit report: Request a free credit report from annualcreditreport.com and dispute any inaccuracies.

2. Pay Down Your Mortgage

The less you owe on your mortgage, the more equity you build. To speed up mortgage repayment:

• Make extra payments: Apply additional funds toward your principal balance to reduce your debt faster.
• Switch to biweekly payments: Instead of making one monthly payment, make half-payments every two weeks, which results in an extra payment each year.
• Refinance to a shorter loan term: If you can afford higher monthly payments, a shorter loan term can help you pay off your mortgage more quickly and build equity faster.

3. Lower Your Debt-to-Income Ratio

Lenders look closely at your DTI to determine if you can handle additional debt. You can lower your DTI by:

• Paying off high-interest debts: Focus on eliminating credit card debt or personal loans to reduce your monthly obligations.
• Consolidating loans: Use a debt consolidation loan or balance transfer to combine multiple debts into a single payment, often with a lower interest rate.
• Avoiding new debt: Don’t take on additional financial obligations before applying for your home equity loan.

4. Shop Around for Lenders

Different lenders may have different requirements and loan limits. To find the best terms:

• Compare interest rates: Lower rates can reduce your overall borrowing costs.
• Look for higher LTV ratios: Some lenders allow you to borrow up to 90% of your home’s value, increasing the potential loan amount.
• Consider credit unions or online lenders: These lenders may offer better terms than traditional banks.

The Bottom Line On Using Your Home’s Equity

To decide if a home equity loan is the right choice for you, make sure you have enough equity, a reliable income, and a good credit score. If you need time to work on these details, consider exploring other options such as personal loans, lines of credit, or low-interest credit cards.

Ready to take the next step? Start your home equity loan application online today and see how it can help you achieve your financial goals.