Find out how much home equity loan you can borrow with our easy-to-use calculator.
Checkout this video:
How Home Equity Loans Work
A home equity loan is a loan that uses your home as collateral. You can borrow against your home equity by taking out a loan against the appraised value of your home. The amount you can borrow depends on your credit score, income, and the value of your home.
The Loan-to-Value Ratio
The loan-to-value ratio (LTV) is the percentage of your home’s appraised value that can be used as collateral for a home equity loan or home equity line of credit (HELOC). Lenders typically lend up to 85% of your home’s appraised value or less. So if your home is valued at $300,000, you may be able to borrow up to $255,000 through a home equity loan or HELOC. But keep in mind that the LTV is just one factor that lenders consider when deciding whether to approve you for a loan or HELOC.
The Combined Loan-to-Value Ratio
A combined loan-to-value ratio (CLTV) is the ratio of all loans secured by a home to the property’s appraised value or sale price, whichever is less. Loan types that are typically considered in a CLTV ratio include first mortgages, second mortgages, and home equity lines of credit (HELOCs).
For example, if you are taking out a $50,000 home equity loan and have a $200,000 first mortgage on the same property, your CLTV would be calculated as follows:
($50,000 + $200,000) / $200,000 = 1.25
This means that your loan is 1.25 times the value of your home. In other words, you have 25% equity in your home.
How Much Home Equity Loan Can I Borrow?
A home equity loan lets you borrow against the equity in your home. The amount you can borrow depends on several factors, including the value of your home, your creditworthiness, and the loan-to-value ratio. In this article, we’ll give you a few tips on how to determine how much home equity loan you can borrow.
Your loan-to-value ratio (LTV) expresses the relationship between your home’s current appraised value and the amount you still owe on your mortgage. It’s important to keep this ratio low — ideally no higher than 80% — to help protect your home equity and avoid having to pay for private mortgage insurance (PMI).
For instance, let’s say you currently have a $150,000 balance on your mortgage and your home is appraised at $200,000. This means that your LTV is 75% ($150,000/$200,000). To avoid having to pay for PMI, you would need to put down at least 20% of the home’s value upfront, which would lower your LTV to 80% or below.
If you’re not sure what your LTV is, you can check out our Home Equity Loan Calculator. Simply enter in your home’s current value and how much you still owe on the mortgage, and it will calculate your LTV for you.
Combined Loan-to-Value Ratio
Your home equity is the portion of your home’s value that you own outright. You can calculate your home equity by subtracting your mortgage balance from your home’s current value.
Lenders use something called a combined loan-to-value ratio (CLTV) to determine how much of a home equity loan or line of credit you can qualify for. The CLTV is calculated by adding the outstanding balance of your current mortgage and the amount of your proposed home equity loan or line of credit, then dividing by your home’s value.
For example, let’s say you have a $100,000 mortgage with a $50,000 balance and you want to take out a $25,000 home equity loan. Your CLTV would be 75% ($50,000 + $25,000 ÷ $100,000).
Most lenders require a CLTV ratio of 80% or less for home equity loans and lines of credit. Some lenders may allow you to exceed this limit if you agree to make interest-only payments for an initial period; other lenders may allow you to borrow up to 100% of your home’s value if the money is used for substantial improvements that increase the property’s appraised value.
How to Get a Home Equity Loan
A home equity loan is a type of loan in which the borrower uses the value of their home as collateral. The loan amount is typically based on the equity in the home, which is the difference between the home’s appraised value and the balance of the mortgage. Home equity loans can be a great way to get funds for major expenses, such as home repairs or renovations.
Applying for a Home Equity Loan
Applying for a home equity loan is a fairly straightforward process. The first step is to find a lender that offers home equity loans. Once you have found a lender, you will need to fill out an application and provide some documentation, including proof of income, a list of debts and assets, and your credit history.
After your application has been reviewed, the lender will give you a loan estimate, which is an estimate of the interest rate, monthly payment, and total cost of the loan. At this point, you can choose to accept or reject the loan offer. If you accept the loan offer, the next step is to complete the loan closing process, which includes signing the loan documents and making any required payments.
Qualifying for a Home Equity Loan
A home equity loan is asecond mortgage on your home. You receive a lump sum and make fixed monthly payments. Because these payments are spread out over a long period of time, usually 15 to 30 years, home equity loans tend to have low interest rates, although your rate will be higher if you have a lower credit score.
To qualify for a home equity loan, you need to have equity in your home — that is, the portion of your home that you own outright. Lenders will typically lend you up to 85% of the value of your home, minus any outstanding mortgage balance. So if your home is valued at $250,000 and you have an outstanding mortgage balance of $150,000, you could qualify for a home equity loan of $50,000.