One of the benefits of homeownership is that you build equity over time and can borrow against that equity when you need it. If you’re not sure how much you need or have multiple projects on your to-do list, a home equity line of credit (HELOC) is a flexible type of financing.
Wondering how much HELOC you can get? Find out how HELOCs work, how much you can borrow and what the repayment process looks like.
Key Takeaways:
- A HELOC lets you borrow against your home equity as needed to pay for major expenses.
- How much you can get with a HELOC depends on how much home equity you have, as well as your credit score and debt-to-income ratio (DTI).
- If you’re on the fence about a HELOC, you also might consider a home equity loan or cash-out refinance.
What Is A HELOC, And How Does It Work?
A HELOC allows you to borrow against your home equity, which is the difference between your home’s current value and how much you owe on it. A HELOC is a revolving line of credit you can draw from as needed up to your credit limit. Most HELOCs have a variable interest rate, which fluctuates with market conditions, so your monthly payments can change over time.
Your lender usually won’t let you borrow all of your equity. But your actual credit line limit depends on multiple factors, including your credit score and DTI, and may be as much as 80% – 85% of your home’s value.
Once you take out a HELOC, the draw period begins. You can draw from the credit line as needed using a debit card, checks or balance transfers. The draw period usually lasts 10 years, and HELOC payments during the draw period are often for the interest only, but some lenders require principal and interest. You’ll make payments on what you’ve borrowed, much like a credit card account. As you pay down your balance, your credit line replenishes and is available to borrow from again.
The repayment period begins after the draw period and typically lasts 10 – 20 years. You can no longer draw on your credit line at that point, and you’ll make payments on principal and interest until the balance is repaid in full.
Some HELOCs may require a balloon payment (the entire remaining balance) at the end of the draw period, though many HELOCs convert to a repayment period with principal and interest payments.You could refinance, take out a loan or use cash savings to pay off the balance.
There is a risk with any type of home-equity financing. A HELOC is a secured loan, and your home is the collateral. If you default on your HELOC or can’t make a required balloon payment, your lender could foreclose, causing you to lose your home. Also, typically you have to pay off your HELOC balance before selling your home, or it must be repaid in full at closing with the proceeds from the sale.
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How Much You Can Borrow On A HELOC?
Your home equity largely determines how much you can borrow with a HELOC. Equity represents how much of your home you own free and clear versus the amount you owe on it. When you take out a HELOC, you’re borrowing this equity and reducing your ownership stake in the home. The amount lenders allow you to borrow against the value of your home depends on several factors, including your credit score, the amount of your primary mortgage, the value of any other loans using your home as collateral (that impact your equity), and debt-to-income ratio.
Borrower Requirements For Getting A HELOC
Here are some common criteria lenders require from borrowers applying for a HELOC:
- Credit score: You typically need a credit score of at least 620 to qualify for a HELOC. Your credit score measures your payment history, outstanding debts and delinquencies. A higher credit score means your lender sees you as less of a borrowing risk.
- Debt-to-income ratio: Your DTI shows how much of your gross monthly income is taken up by debt payments. A lower DTI shows lenders you have room in your budget to afford the loan payments, while a higher DTI suggests you may struggle to repay your HELOC. Lenders typically look for a DTI no higher than 43%.
- Home Equity: To qualify for a HELOC, you’ll need a minimum amount of equity in your home. Most lenders require that you keep 15% – 20% equity in your home after taking out the HELOC.
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How Much Equity Do You Need For A HELOC?
The maximum credit line you can get depends on how much equity you have in your home as well as additional lender requirements. Lenders typically limit your combined loan-to-value ratio (LTV) to about 80% – 85% of your home’s value, including your existing mortgage and the HELOC.
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How To Calculate Your HELOC Borrowing Limit In Three Steps
When considering a HELOC, the amount you can borrow depends on a variety of factors. Let’s say you own a home worth $450,000 and have an outstanding mortgage balance of $300,000. Here are three steps to calculate your maximum HELOC amount.
1. Estimate Your Home’s Market Value
Your lender will determine your home’s market value by ordering an appraisal. A licensed appraiser will assess the value by examining the home’s location, size and current condition. They’ll also look at what comparable homes in the area have sold for to determine the value.
2. Multiply By Your HELOC Limit
Once you know your home’s fair market value, multiply it by your lender’s HELOC limit. If your home is worth $450,000 and your lender’s limit is 85% of that value, that comes out to $382,500.
3. Subtract Your Current Mortgage Balance
Finally, you’ll subtract your current mortgage balance to come up with your borrowing limit. Since you still owe $300,000 on your mortgage, you’ll subtract that number from $382,500. That leaves you with a borrowing limit of $82,500, assuming you meet the lender’s requirements for credit score and DTI.
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Alternatives To A HELOC
If you’re not sure a HELOC is the right choice, there are other ways you can borrow against the equity in your home.
Home Equity Loan
A home equity loan is often called a second mortgage since it’s a loan you’ll take out separately from your current mortgage. That means you’ll have to make two monthly mortgage payments on your home. A home equity loan usually comes with a fixed rate, meaning your monthly payment will stay the same. Most lenders allow total borrowing up to about 80% – 85% of the home’s value when combining both loans. Unlike a HELOC, a home equity loan is paid as a lump sum.
Cash-Out Refinance
A cash-out refinance is essentially a new mortgage loan. You use it to pay off your original mortgage and keep the difference in cash to use for pretty much any purpose you’d like. You repay the amount borrowed as part of your new mortgage and can spread out payments over the term of your choice, up to 30 years.
FAQ
Debt consolidation
Home improvements or repairs
College tuition and other education expenses
Medical expenses
Emergency fund
When you pay off and close a HELOC, you could see your credit score drop since you’ll have less available credit. On the other hand, carrying less revolving debt could help balance out your score.
The Bottom Line: A HELOC Gives You Access To Your Equity
If you’ve built equity in your home, a HELOC gives you access to a consistent line of credit, and you can use the funds for pretty much anything. How much you can borrow depends on the amount of equity you have as well as your ability to afford the payments. Each lender has its own maximum credit line amount based on a percentage of your equity. But if you qualify and it makes financial sense, a HELOC remains a flexible way to access your equity as needed to pay for major expenses.
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Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
