How Much Home Equity Loan Can You Get?

Do you want to give a facelift to your outdated bathroom? Or do you have a leaky roof in need of costly repairs? If you don't have the funds on hand, you may want to consider a home equity loan to cover such expenses. You can use this type of loan for whatever you wish. But, before using your home’s equity, it’s important to understand how much you can borrow and the implications.

Let's explore the factors that determine your borrowing limit.

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

Wondering how much home equity loan can I get? The maximum home equity loan amount varies by lender, but typically you can borrow between 80% – 85% of your home’s value, minus your current mortgage balance. Some lenders may even allow you to borrow up to 90% of your home's value.

Calculating Your Home Equity Loan Limit 

The amount you can borrow with a home equity loan starts with figuring out how much equity you have in your home. Simply subtract your mortgage principal balance from your home’s appraised value. Your lender can share the principal balance with you for reference. As part of the lending process, they will likely have a professional appraisal figure out your home’s value. For example, if your home is worth $450,000 and you owe $250,000, you have $200,000 in equity.

Typically, to qualify for a home equity loan, you need to have at least 15% to 20% equity in your home, resulting in a loan-to-value (LTV) ratio around 80% to 85%. So, if your home is valued at $450,000, you'd need about $67,500 to $90,000 in equity to qualify.

In our example, with a home valued at $450,000 and a mortgage balance of $250,000, you have an LTV ratio of about 45%. If you apply for a $45,000 home equity loan, your combined loan-to-value (CLTV) would be around 65%.

Remember, the less you owe on your mortgage compared to your home's value, the more you can potentially borrow. However, even if you have a higher mortgage balance relative to your home's value, there are still possibilities to qualify for a home equity loan, offering optimism for financial flexibility.

What Affects Your Maximum Home Equity Loan Amount? 

Several factors influence the maximum home equity loan you can borrow, with home equity being the first consideration. Home equity is the difference between your remaining mortgage balance and your property’s market value. Put simply, it’s the portion of your home that you own outright. As you pay off your mortgage, your equity grows. When you have sufficient equity built up, you can use it to secure a home equity loan.

Home Value

Your home’s value, also known as the current market value, is what a buyer would pay for it, and it significantly influences how much lenders will allow you to borrow. This value determines the equity you have in your property. Because home values fluctuate based on factors such as market conditions and location, they can change over time, impacting both your equity and the maximum amount you can borrow.

Personal Requirements

Even if you have plenty of equity in your home, you must still meet lending requirements to borrow against your equity. Here are a few common lending requirements:

• Credit score: Your credit score indicates your dependability in repaying debts to lenders. Having a higher score can increase your chances of being approved for a loan and your chance of getting a favorable interest rate. While lending requirements differ, lenders usually require a credit score of 620 or above. Rocket Mortgage requires 680 credit score. 
• Debt-to-income ratio (DTI): Your DTI is a ratio that represents the percentage of your monthly income that goes toward paying off debts. Lenders look at this number to determine if you're financially stable and able to handle more debt. Most lenders require your DTI to be 50% or below.  
• Closing costs: Like with a mortgage, home equity loans come with closing costs. When you take out a home equity loan, you'll need to cover these expenses, ranging from 2% to 6% of the loan amount.
• Home and title insurance: Home insurance can be a requirement for qualifying for a home equity loan. Homeowners insurance protects your home from damage caused by events such as fire or severe weather. Additionally, title insurance ensures the lender's interest in your property is protected in case of title issues, like defaulted loans associated with it.

Benefits Of Taking Equity Out Of Your House

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

• Low, fixed interest rates: Home equity loans usually offer lower interest rate options than other borrowing types. Plus, these rates are typically fixed, so your payments remain predictable regardless of the broader economy.
• Affordable monthly payments: With relatively low interest rates and repayment terms stretching from 10 to 30 years, your monthly payments can be pretty manageable.
• Flexibility in use: Lenders usually don't restrict how you use the money. That said, you can use the proceeds from the loan for any purpose, such as paying off high-interest debt or launching a business.

Drawbacks Of Taking Equity Out Of Your House 

• Higher interest costs over longer terms: While longer terms make payments more manageable, they also result in higher interest costs over time.
• It's important to be aware that your home secures home equity loans. This means that if you're unable to make the monthly payments, you could face the risk of foreclosure. Therefore, it's crucial to select a loan amount, term and interest rate that you can comfortably manage, even during challenging times.
• Standard lending requirements: Like other types of loans, you'll need to meet lending requirements to qualify. Typically, you'll need a credit score of at least 620 – 680, a debt-to-income ratio of around 50% or lower, and a stable income, though lenders' requirements vary. 

The Bottom Line 

To determine if a home equity loan is right for you, ensure you have enough equity, stable income and a strong credit score. The loan amount is based on lender criteria and your home's value, but remember, your home is at risk if you miss payments. Consider alternatives like personal loans, lines of credit or low-interest credit cards.

Ready to explore your options? Start your home equity loan application online today to see if it fits your financial goals.