How Much Can You Borrow With a Home Equity Loan?

If you own a home and you need cash for a financial emergency, or to pay for renovations or consolidate debt, you might turn to a home equity loan. This lets you borrow against your home's value, often at a lower interest rate compared to other kinds of loans.  

Many lenders let you borrow up to 80% to 85% of your home's appraised value. We’ll walk you through calculating loan amounts, how to qualify, home equity loan types, and how much you might qualify to borrow. 

How Much Can You Borrow With a Home Equity Loan or Line of Credit?

Two key factors limit how much you could borrow with a home equity loan. The first is a dollar limit set by the lender. Second is the lender’s combined loan-to-value limit (CLTV). 

Loan-to-value means the total amount you owe on your home compared to your home’s value. When you want to borrow against your home equity, the lender looks at your current mortgage balance (if you have one) and the home equity loan you want. They add the loans together and compare the total to your home’s value. 

CLTV example

Let’s say the lender’s maximum CLTV is 80%. Your home is worth $500,000, and you still owe $250,000 on your mortgage. The lender verifies the value of your home (you can get an idea of your home’s value by checking real estate websites).

For this lender, your maximum CLTV will be $400,000, which is 80% of your home’s value. Since you still owe $250,000 on your mortgage, you could apply for a home equity loan of up to $150,000 and remain under the lender’s maximum CLTV.

Highest maximum home equity loan amount

Many home equity loan lenders have a maximum CLTV of 80% as in the example above. However, there are some lenders that let you borrow more than this. High-limit lenders may offer a CLTV of 90% or, less commonly, may let you borrow up to 105% of your property's value.

Every lender weighs your credit profile, the value of your home, and the loan amount you want when deciding how much to lend you. Even if all those factors look great to your lender, if you have a very expensive home, you might not be able to borrow up to 80% if that amount would put you over the lender's dollar limit for this kind of loan.

Always check with your lender to see what its maximum CLTV is. Usually a quick email or phone call is enough. If you're looking to borrow more than 80% of your home's value, you may have to do some extra digging to find lenders who offer larger loan amounts.

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How Do You Qualify for a Home Equity Loan?

Appraised value isn’t the only factor your lender will consider. A lender also looks at things like:

• Your income. Lenders like to know you have a regular source of income and can pay back the loan. You may need to provide W-2s and pay stubs for the last two years to prove your income is consistent over time.

• Your credit score. Each lender requires its own minimum credit score for a home equity loan. A higher score could help you get a lower interest rate, but you might still qualify with a lower score. Some home equity lenders like to see scores of 680 or better. Credit score requirements are often flexible, though, and could vary depending on the amount you want to borrow and why. For example, a lender might allow you to apply with a lower credit score if you’re using the money to consolidate other debts and you agree to let the lender send the money directly to them. 

• Your credit history. Most lenders are interested in the types of accounts you have, your payment history, and whether you have balances in collections. If you have a lot of outstanding debt, you may not qualify even with good credit.

• Your debt-to-income (DTI) ratio. The percentage of your overall monthly income that goes to paying debt and housing is called your debt-to-income ratio (DTI). A high DTI means there might not be room in your budget for a new loan payment. A DTI at or below 43% could help you get the loan you want, but some lenders allow a higher DTI. 

These are just some of the indicators lenders use to assess your ability to repay your loan. They typically also look into your employment situation, recent applications for new credit accounts, and other factors.

You typically need to provide your lender the following documentation for a home equity loan:

• Your birthdate

• Your address

• Your Social Security number

• Pay stubs for the past month

• Information on your year-to-date income

• Employment history for the last two years

• Mortgage statement (if you still have a mortgage on your home)

• List of other debts

• Proof of homeowners insurance

The lender then conducts an appraisal of your home to determine its value and the maximum you could borrow. Typically, an automated valuation model (AVM) does the appraisal. This is an online tool that estimates the value of your property based on a history of sales in the area and details about the home, like the year it was built and the number of bedrooms.

It could take several weeks for a lender to review your application and make its decision. However, it’s possible to get a home equity loan or HELOC funded in as little as two weeks after you submit all your paperwork.

What Are Your Home Equity Loan Options?

Here are the three standard home equity loans you’re likely to find.

Cash-out refinance loan

With a cash-out refinance, you pay off your existing mortgage with a new, larger loan. Then you get the difference back in cash. The cash-out refi loan replaces your current mortgage. Cash-out refi loans are worth considering if you qualify for a lower rate than you’re paying on your current mortgage, and you want to borrow extra cash at the same time.

Home equity line of credit (HELOC)

A home equity line of credit (HELOC) is a type of second mortgage that works much like a credit card. If you’re approved, you get a line of credit, and can borrow from it whenever you want, up to your loan limit. You control how much you borrow at any given time. If you pay back some of what you've borrowed over time, you replenish your available credit and can borrow more.

The borrowing period on a HELOC typically lasts for five to 10 years. This is called the draw period. When the draw period ends, you enter the repayment period, and can’t borrow more.

The interest rates on HELOCs tend to be lower than the rates on personal loans and credit cards because HELOCs are guaranteed by your home. Like credit card interest rates, many HELOC interest rates are variable and may fluctuate. 

HELOCs may be a good option if you have several upcoming expenses you need to cover, particularly if you don’t know the exact amount you need.

Traditional home equity loan

A home equity loan is a one-time lump-sum loan guaranteed by your home. Like HELOCs, home equity loans are second mortgages, and tend to have lower interest rates compared to personal loans and credit cards. Many traditional home equity loans carry fixed rates and fixed monthly payments for the life of the loan.  

A home equity loan could be a good choice if you need a large amount of cash all at once. Many people use traditional home equity loans to pay off debt, cover a home renovation project, or pay off student loans. It's possible to get a home equity loan with bad credit, too.

The interest you pay on a cash-out refinance loan, HELOC, or home equity loan may be tax-deductible. Talk to a qualified tax advisor about your situation.

Home Equity Loan Payment Examples

Several factors determine the size of your home equity loan payment, including your interest rate, loan term, and loan amount. Here are examples to illustrate how these payments work.

If you're taking out a $100,000 home equity loan with a 12% interest rate and a 20-year loan term, you'll have a monthly payment of $1,101. 

Say you want a $500,000 home equity loan. With a 12% interest rate and a 30-year term, your payment would be $5,143 per month. But if you qualify for an 11% loan, your payment would drop to $4,762—a savings of $381 per month. After you apply, ask the lender what you would need to do to get the next lower rate that they offer. If your credit score is close, for example, to the lender’s cutoff for a lower rate, maybe you can take steps to improve it and then apply again.

You may have lower initial payments if you choose a HELOC from a lender that allows interest-only payments during the draw period. In this case, your payments will go up quite a bit when the draw period ends. Also, the amount you owe won’t go down even though you’re making payments. Repaying some of the principal—the amount you actually borrowed—during the draw period could help with the sticker shock. 

If you're doing a HELOC, it's worth checking with the lender to see what your payments might look like at the end of the draw period. But keep in mind HELOCs often have variable interest rates, and it may not be possible to make exact predictions. If you find a home equity loan isn't the right choice for you, you may need to consider other debt relief options, like debt settlement.

Common Home Equity Loan Disqualifiers

Here are some of the main things that give home equity loan providers pause:

• Insufficient equity: If you have little to no equity in your home, perhaps because you just took out your first mortgage, you’re likely to have trouble finding lenders willing to work with you. Consider waiting until you've made some more loan payments and built up some more equity.

• Low credit score: Lenders look at your credit history to see how you've handled borrowed money in the past. If you've struggled with loans or credit card debt before, the lender may worry that you'll fall behind on your payments.

• High debt-to-income ratio: If your debt-to-income ratio exceeds 43%, lenders may worry that granting you a home equity loan would leave you juggling too much debt. That could put you at risk of falling behind on your payments.

• Unstable employment history: Lenders like to see a steady employment history so they know you have a regular source of income to make payments with.

• Recent bankruptcy or foreclosure: Bankruptcies and foreclosures indicate that you've struggled with borrowed money in the past.

• Certain property types: If you're trying to take out a home equity loan on a condo, a multifamily home, a manufactured home, or a home on leased land, you may have to jump through some extra hoops during the lending process. Some lenders don’t offer loans on these types of properties, or have different guidelines to qualify.

If any of these apply to you, remember that all lenders are different. Some may be willing to work with you even in the above situations. It doesn't hurt to check around with a few lenders to see what they're willing to offer you. 

If you can't find anyone willing to work with you right now, there might be steps you could take—like working with a professional debt settlement company to deal with your debt—that could help you qualify for a home equity loan down the road.

People just like you are seeking debt relief in Montana and across the country. The first step is the most important one—explore your options.

What Fees and Other Costs Will You Have to Pay?

As with your original mortgage, there are fees and closing costs associated with home equity loans. These vary depending on the lender, but could range from 3% to 6% of the total loan amount. 

You may have to pay for:

• Loan origination (a fee the lender charges for making the loan)

• Home appraisal

• Loan application

• Attorney

• Title search

• Paperwork filed

• Credit report 

• Property tax proof

• Flood evaluation certificate (if applicable)

Some lenders may roll these costs into the home equity loan itself so you don't have to pay separately.

Deciding if a Home Equity Loan Is Right for You

If you’re asking how much you can borrow with a home equity loan, you may already understand one of the benefits of homeownership. It's not just about having your own space—owning a home could also give you access to a financial reserve to draw upon when needed. That may help you avoid debt problems, but if you find yourself struggling, know that you have options. There are debt relief programs that might be a good fit for you.

Read Next: 5 Smart Ways to Use Your Home Equity