Home Equity Loans and HELOCs are Booming. Learn How Much You Can Borrow

An image of a house balancing on a scale with coins on the other side is used to illustrate an article about home equity. Credit: Shutter2U / t_kimura / Joe Schmelzer / Getty Images
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The real estate market may have cooled slightly over the past few months, but one thing hasn’t changed: Home values are still near record highs.

That’s great news for current homeowners, and translates to sizable amounts of equity for many of them. If that’s you, it’s reasonable to think about your next home renovation project and wonder: How much equity can I borrow from my house?

Borrowing with a home equity loan or line of credit (HELOC) can be a solid way to fund home renovations or finance other big expenses. But it’s not “free money,” and there are limits to how much you can borrow. Here’s how to calculate how much cash you can borrow from your home.

How Much Equity Can I Borrow From My House?

Before you can calculate the amount of equity available in your home, you need to know exactly how much your home is worth. 

This usually happens with an appraisal, which a lender will set up when you apply for a home equity loan or line of credit. A professional appraiser will evaluate your home based on its condition and comparative sales in your area to determine its value.

Once you’ve got that number, you’ll want to focus on the Loan-to-Value ratio, which is simply the relationship between your mortgage amount and home value. The difference between these two numbers is the total amount of equity in your home.

But you can’t borrow every single dollar of equity in your home. “You can generally take out up to 80% of your equity,” said Jennifer Beeston, senior vice president of mortgage lending at Guaranteed Rate, an online lender. It depends on the specific lender, but 80% is the norm, with some lenders pushing toward 90% at the most.

Here’s the formula: Available Equity = (0.80 x Home Value) – Mortgage Amount

This is how that would play out in a couple of examples:

Home ValueMortgage AmountAvailable Equity to Borrow
$500,000$250,000$150,000
$250,000$100,000$100,000

Home Equity Loan vs. HELOC

There are two main ways to tap the equity in your home: A home equity loan or a home equity line of credit (HELOC). 

A home equity loan is basically a second mortgage that you add on top of your original mortgage. The loan would give you a lump sum of cash all at once, and you would pay it back with fixed monthly payments over the life of the loan (just like your mortgage). 

A home equity line of credit functions more like a credit card. You would get approved for a certain amount, but you don’t get a lump sum of cash. Instead, you can borrow up to the limit as you need, and only pay back what you use.

Home equity loans are generally better-suited to large renovation projects where you need most of the cash upfront, and the cost is fairly predictable. A HELOC, on the other hand, can be useful for ongoing work, or when you’re not sure how much you’ll need. Keep in mind, though, that HELOCs often have variable interest rates, meaning your monthly payments could very well go up over time.

Risks of Taking Equity Out of Your Home

Home equity loans can be a great way to borrow money at a low interest rate, but they’re not without their risks. Here’s what experts say you should be aware of:

Using Your House as Collateral

“The biggest [risk] to me is that you are collateralizing your debt against your home,” says Teresa Arrigo, a financial advisor with GenWealth Financial Advisors. “When you do that, the collateral is your home, so if you’re overextended at any point, you could lose your entire home.”

Indeed, that’s the reason interest rates are low for these types of loans: The lender knows that if you ever stop paying, they can foreclose on your house and recoup their loss.

Using your house as collateral is especially risky if home values drop. If you owe more than your home is worth in the future, you could be stuck in your home until home values rise again.

Covering Up Bad Spending Habits

If you’re taking out a home equity loan because you don’t have the cash to pay for something, stop and ask yourself why. Is it because you have poor budgeting or spending habits?

Borrowing more money, in that case, likely won’t help your financial situation. “You’re not dealing with the underlying issue that got you here,” Arrigo says.

Taking on Too Much Debt

With any type of loan, there’s a risk of taking on more debt than you can handle.

“HELOCs can be great, but if you don’t really need the money, you really need to ask yourself, why are you taking it out?” Beeston says. And, more importantly, how are you planning on paying it back? 

Requirements for Home Equity Loans and HELOCs

Qualifying for a home equity loan or HELOC is very similar to qualifying for your first mortgage. Here are some of the standard requirements:

  • Proof of income: The lender will want to see proof of reliable income that’s high enough to cover loan payments. You can prove this by giving the lender pay stubs or bank statements.
  • Credit history: The higher your credit score, the easier it will be for you to get a loan. Lenders want to see that you have a history of paying off your debt on-time.
  • Debt-to-income ratio: Even if your income is high, the lender will want to make sure you’re not already weighed down by too many other debt payments. They’ll examine your debt-to-income ratio, which shows how much of your income is being consumed by debt payoff.
  • Percentage of equity established: Based on the appraisal of your home, the lender will assess how much total equity you have available, and then offer a percentage of that based on their lending standards.

Frequently Asked Questions (FAQ):

Is there a minimum for home equity loans?

It depends on the lender, but most are not willing to lend any less than $5,000-$10,000 in home equity, according to experts.

How do I calculate my home equity?

You can calculate your home equity by subtracting your mortgage amount from your total home value. For example, on a home that’s worth $500,000 with a $300,000 mortgage, there is $200,000 of total equity. But a lender typically won’t let you borrow more than 80% of your equity, meaning in this example, you might be limited to taking out $100,000.

How can I take out a home equity loan?

“The first step would definitely be to contact a mortgage lender of some sort to help you get that ball rolling,” Arrigo said. They can help you understand your loan-to-value ratio, and what the loan options are available for you.