If you own a home and you need cash to deal with a financial emergency, pay for renovations, or consolidate debt, you could borrow from your home equity to cover these expenses. But it can be hard to know exactly how much equity you can borrow from your home, let alone what your options are.
Generally, lenders let you borrow between 75%-90% of your home equity. However, there are many other factors that affect how much equity you can borrow from your home. These include your home’s appraised value, the type of loan you take out, the terms of your loan offer, your income, your credit history, and more.
To help you find out how much equity you can borrow from your home and understand the factors that influence how much you can borrow, we’ve answered some of the questions homeowners ask about calculating equity, how to qualify, loan options, and more.
How to Calculate How Much Equity You Can Borrow from Your Home
To figure out how much equity you can borrow from your home, start by figuring out your home equity. To do this, subtract what you still owe on your mortgage from the current value of your home. Say your home is worth $350,000 and you still owe $200,000 on your mortgage. This would give you $150,000 in equity.
Next, figure out how much you can borrow from your home equity. Since lenders usually only let you borrow 75%-90% of your home equity, multiply your current home equity by .75 and .9 to get an idea of how much you’d be able to borrow. So if you have $150,000 in equity, you may be able to borrow between $112,500-$135,000 from your home before closing costs and fees.
It can be difficult to calculate how much you can borrow from your home equity on your own. Luckily, tools like this home equity loan calculator can estimate your home value and tell you how much equity you might be able to borrow based on the information you provide.
How Do You Qualify to Borrow Equity from Your Home?
After figuring out how much equity you can borrow from your home, it’s time to figure out if you even qualify to borrow from your home equity. After all, lenders aren’t going to hand over cash just because your home value is higher than your mortgage. Here are some of the factors they consider before deciding whether or not to lend to you:
Your Credit Score
In order to borrow equity from your home, your credit score generally needs to be higher than 620. But to get better interest rates, you want to aim for between 621-759. Anything over 760 will garner you the best rates available. If your score is too low, work on increasing it first by paying down debt.
Your Credit History
Before they let you borrow from them, most lenders will be interested in the types of accounts you have open, your payment history, and whether you have any outstanding balances in collections. If you have a high degree of outstanding credit, you may not qualify even with a high credit score.
Your Debt-to-Income (DTI) Ratio
The percentage of your overall monthly income that goes to paying debt is called your debt-to-income ratio, or DTI. If this number is too high, you may have trouble borrowing from your home equity. In most cases. lenders want to see your debt-to-income ratio at 36% or lower.
The factors explained above are just some of the indicators lenders use to establish your ability to repay your loan. They will also look into your employment situation, your income and assets, and whether you’ve taken out any other large loans recently.
What Are Your Home Equity Loan Options?
If you meet the qualifications above, you may qualify for a home equity loan. But you should know that you have several different home equity loan options. Which one is right for you will depend on how you want to use the money. Here are the three standard home equity loan options available to you:
Cash-Out Refinance Loan
With this method, you’re refinancing your existing mortgage and creating a new, larger loan. You’re adding the borrowed amount to the principal of your existing mortgage, with the result that you still have only one lien against your property. Then you pay the bigger debt over the life of your re-financed mortgage terms.
Cash-out refi loans allow you to take money out of your home and refinance your current mortgage rate. Because of this, cash-out refi loans are best for people who want to get a lower rate on their mortgage and pull money out of their home at the same time.
Home Equity Line of Credit (HELOC)
This type of loan works much like a credit card in that you get a line of credit up to the maximum amount available to you and can borrow from it whenever you want. This is more flexible as you control how much you’re borrowing at any given time. Additionally, the interest rates are typically lower than other lines of credit and will be fixed for the life of the loan, so you don’t have to worry about fluctuation.
Since home equity line of credit loans let you borrow equity from your home over five years (also known as the draw period), these loans are best for people who have several upcoming expenses they need to cover.
Traditional Home Equity Loan
Also known as a “second mortgage,” this option is a good way to get access to a lump sum of cash at a reasonable interest rate. The benefits of a traditional home equity loan include fixed rates with no up-front fees and fixed monthly installments for the life of the loan. In addition, the interest may be tax deductible if you plan to use the money for home renovations.
Traditional home equity loans allow you to borrow a lump sum from your home equity and use that money however you want. Home equity loans are best for people who need a large amount of cash all at once. Many people use traditional home equity loans to pay off debt, cover home renovation project, or pay off student loans.
What Fees and Other Costs Will You Have to Pay?
Like any other type of loan, borrowing from your home equity comes with a cost. Similar to your original mortgage, there are fees and closing costs associated with borrowing a home equity loan. The costs vary depending on the lender, but usually range from 2% to 5% of the total loan amount. You may also have to pay fees for:
- Home appraisal
- Loan application
- Title search
- Paperwork filed
- Credit report pulled
- Property tax proof
- Flood evaluation certificate (if applicable)
While these fees can get expensive, they could be worth the cost depending on how you plan to use your home equity.
Borrowing Equity from Your Home: The Bottom Line
If you borrow equity from your home for the right reasons, shop around for the best terms, and assess the risk factors very carefully, borrowing from the equity in your home can be a smart strategy. But it can’t be stressed enough: do your homework, read the small print, and—above all—make the loan payments on time every month.