Home equity lines of credit (HELOCs) are useful tools for consolidating debt and covering the costs of home repairs and renovations. However, whether you should use one for your own financial goals depends on how much cash you need and the amount you qualify to borrow. How much could you potentially get with a HELOC? Here’s how to run the numbers.
The amount of money you can get from a HELOC depends on the maximum combined loan-to-value ratio your lender allows. Your CLTV ratio refers to the amount you owe on the home compared to its total value. If you have taken out multiple loans on the property, include the debt on all of those loans when calculating your CLTV.
Generally speaking, most companies allow you to borrow between 80% and 85% of the value of your home, minus the current balance of your mortgage.
So let’s say a lender allows 85%. To calculate what you could potentially borrow, you would use this equation:
(Home value x 0.85) – Mortgage balance = Amount you can borrow
Example: Let’s say you have a home valued at $350,000 and a current mortgage balance of $100,000. If your lender allows you to borrow up to 85% of the value of your home (less the outstanding balance), then you can borrow up to $197,500.
Using the equation above, the calculations would look like this: ($350,000 x 0.85) – $100,000 = $197,500. Now, let’s break that down:
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$350,000 x 0.85 = $297,500
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$297,500 – $100,000 = $197,500
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Total amount you could borrow through a HELOC: $197,500
Many HELOC lenders have online calculators you can use if you don’t want to do the math yourself. These can give you a rough idea of ​​how much you could borrow from that particular company.
Your CLTV ratio is not the only factor a lender considers when determining the amount you can borrow with a HELOC. They will also take into account the following:
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Home Appraisal Value: The value of your home is important as it is directly related to the equity you have and therefore how much you can borrow. The higher the value of your home, the more you can potentially qualify to borrow with a HELOC.
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Debt-to-income ratio (DTI ratio): Your DTI ratio reflects how much of your income goes toward paying down debt. HELOC lenders generally require that you have no more than a 40% to 50% DTI ratio, although the lower your ratio, the more money you can borrow.
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Credit score: Mortgage lenders use your credit score to assess how risky a borrower you are. A higher score indicates that you make payments on time and are good at managing your money, while a lower score indicates the opposite. You may be able to borrow more or get a better HELOC rate with a higher credit score.
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Income: Lenders want to be sure that you can afford your monthly HELOC payments, both now and in the future. For this reason, how much you earn and how consistent your income is can also affect your borrowing power.
Lenders typically have maximum line of credit amounts that play a role. For example, PenFed Credit Union HELOCS has a maximum loan limit of $500,000.
If you’re worried about not qualifying for a HELOC or being able to borrow the amount you need, there are other financing options you can consider. One of the following might be more suitable:
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Home equity loans: Home equity loans are similar to HELOCs, except instead of ongoing access to a line of credit, you receive a one-time lump sum payment. Home equity loans typically have fixed interest rates, while HELOCs charge variable rates.
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Reverse Mortgages: These are loans available to homeowners age 62 or older (sometimes 55, depending on the lender). Instead of making payments to your lender, the company pays you with the equity in your home: as a monthly payment, a lump sum, a line of credit, or even a combination of all three.
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Cash Out Refinancing: With this tool you replace your current mortgage loan with a larger one and receive the difference in cash. Keep in mind that refinancing will replace the rate and term of your loan, which may not be advisable if you have an ultra-low interest rate.
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Home Equity Sharing Agreements: These allow you to obtain a lump sum payment in exchange for a portion of the future value of your home. They require no monthly payments and do not expire until the end of the term or when you sell your home.
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401(k) Loans: If you have a 401(k) retirement account, you may be able to borrow money through a 401(k) loan to buy a home. This gives you a lump sum of cash.
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Personal loans: These loans can also be an option, but because they are unsecured loans (meaning they have no collateral), they will generally have higher interest rates than other financing strategies.
FURTHER: See our top picks for the best home equity loan lenders.
It depends on your lender, but generally speaking, you can typically borrow between 80% and 85% of the value of your home minus any mortgage balances you have on the home. So, let’s say your house is worth $300,000 and you still owe $100,000 on it (which means you have $200,000 in equity). You can borrow between $140,000 and $155,000 with a HELOC.
The downside to a HELOC is that it typically comes with a variable interest rate, which can make budgeting and planning difficult. They also use your home as collateral, putting it at risk of foreclosure if you don’t make your payments.
In most cases, you will need a home appraisal before you can get a HELOC. The lender uses the appraisal to determine the value of your home and, subsequently, how much equity you have to borrow.
Yes, you can pay off your HELOC balance early, which could save you interest costs. Just make sure your lender doesn’t charge you any prepayment penalties before you do so.
Laura Grace Tarpley Edited this article.