How Much Home Equity Loan Can I Get? A Complete Guide
One of the primary advantages of owning a home is building equity as you pay down your mortgage. Equity translates into profit when you sell your home, but you also can borrow against it with a home equity loan. How much you can borrow depends on how much equity you have and how well you meet your lender’s financial requirements.
Key Takeaways:
- A home equity loan is a second mortgage that lets you borrow a lump sum using your home as collateral.
- How much you can borrow depends on how much equity you have and the policies of the lender you’re working with.
- You must meet the eligibility requirements and fit another monthly payment into your budget.
How Home Equity Loans Work
A home equity loan lets you borrow your equity, which is the difference between what your home is worth and how much you owe on it. Your home is collateral for the loan, which you receive as a lump sum and can be used for home improvements, education expenses, debt consolidation or anything else you need cash for.
However, taking on a second mortgage means repaying the loan in installments over a specific period. Home equity loans typically have a fixed interest rate, so the monthly payment remains constant until the loan is paid off.
Home Equity Loan Requirements
To get a home equity loan, you need to meet the lender’s eligibility requirements. While specific requirements vary by lender, you’ll likely need to meet the following criteria:
- Minimum home equity. Lenders typically require you to have at least 15% to 20% equity before you can take out a home equity loan.
- Minimum credit score. Expect to need a credit score of at least 680 to qualify. Some lenders will require a credit score of at least 720.
- Maximum debt-to-income ratio. Your DTI ratio measures how much of your monthly income goes toward debt. Your DTI ratio typically can’t exceed 50% to get a home equity loan.
- Ability to pay closing costs. As with your first mortgage, you’ll need to pay closing costs to get a home equity loan. These fees typically total 2% to 6% of the loan amount.
How Much Equity Can You Borrow From Your Home?
To know how much equity you can borrow, you need to know how much equity you have. You can calculate your home equity by taking the fair market value of your home and subtracting the amount you still owe on the mortgage.
For example, if your home’s current market value is $400,000 and you owe $180,000 on your mortgage, you have an estimated $220,000 in equity. Once you’ve got an idea of how much equity you have, multiply that figure by the maximum percentage of your home’s value your lender will allow you to borrow.
“Lenders usually allow you to borrow up to 85% of your home’s appraised value minus any outstanding mortgage balance,” says Mike Wall, a Realtor at eXp Realty in Cincinnati and CEO of EZ Sell Homebuyers in Dayton, Ohio. “So, if your home is appraised at $300,000 and you owe $150,000 on your mortgage, you may be able to borrow up to $105,000 – 85% of $300,000 minus $150,000.”
Some lenders will let you borrow up to 90% of your equity if your credit is excellent. If your credit isn’t so hot, the maximum amount of equity you can borrow may be less than 85%.
Is There A Minimum Home Equity Loan Amount?
Some lenders won’t issue a home equity loan for less than $10,000, while others require you to borrow at least $35,000.
Are Home Equity Loans A Good Idea?
Here’s a rundown of the advantages and disadvantages of taking out a home equity loan.
Pros And Cons Of Home Equity Loans
| Pros | Cons |
|---|---|
| Interest rates usually are lower than for credit cards or personal loans. | You need at least 15% to 20% equity in the home. |
| Fixed interest rates make your monthly payments predictable. | You need to meet the lender’s credit score and DTI ratio requirements. |
| Approval may be easier to get than with other loan types. | Your home is collateral for the loan, so you could lose it if you default. |
| No restrictions on how you use the money. | You’ll have an extra monthly payment. |
| The loan is paid to you in a lump sum. | You need to pay closing costs. |
| Repayment terms tend to be longer than with other loan types. | If you sell the home, you must pay off the balance. |
| The interest you pay on a home equity loan may be tax deductible. |
FAQ
Here are the answers to some frequently asked questions about home equity loans.
The Bottom Line
Building equity is one of the many benefits of owning a home. Borrowing what you’ve built with a home equity loan can help you finance projects or pay other expenses. How much you can borrow depends on your equity, the lender you’re working with, and your finances.
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