Can you get a home equity loan that's larger than your equity?
If you're a homeowner looking for a way to tap into your home's value and borrow money, a home equity loan might seem like an ideal solution. These loans allow you to borrow against the portion of your home you've already paid off, often with a lower interest rate than you'd be offered with other options. And, in today's high-rate landscape, home equity loans may be a particularly smart way to borrow, considering that the average home equity loan rate is just over 8% currently — but the average credit card rate is closing in on 23% and the average personal loan rate exceeds 12% now.
The rate differential isn't the only selling point of a home equity loan right now, either. The average homeowner also has a lot of equity to tap into — about $313,000 worth currently — making this option a good one if you need to borrow large amounts of money. You generally can't borrow anywhere close to that amount with a credit card or personal loan, after all, so if you're trying to consolidate debt or put a large down payment on a second home, your home equity may be your best source of funding.
But what if your financial needs exceed the equity you currently have? Can you still rely on your home's equity to borrow what you need — or do home equity lenders always limit your borrowing capacity based on the amount of equity you've built in your home?
See how much equity you could potentially borrow here.
Can you get a home equity loan that's larger than your equity?
In general, most home equity lenders will not approve a home equity loan that exceeds the amount of equity you've built in your home. Home equity loans are secured by your property, which means lenders need to ensure that the amount borrowed doesn't exceed the home's actual value. So, lenders typically use a loan-to-value (LTV) ratio to determine how much you can borrow, and most allow homeowners to borrow a maximum of between 80% to 90% of their home's current market value, minus any existing mortgage balance.
For example, if your home is worth $300,000 and you still owe $200,000 on your mortgage, your equity is $100,000. If your lender has an 85% LTV cap, you could potentially borrow up to $55,000 ($300,000 x 85% = $255,000 - $200,000 = $55,000). In this scenario, you wouldn't be able to borrow more than your available equity.
That said, some government-backed programs, particularly for home improvements or energy efficiency upgrades, might allow borrowing that temporarily exceeds current equity. And, some lenders offer high-LTV loans or even loans that exceed 100% of your home's value, but only in rare circumstances. However, these options can come with stricter requirements due to the higher risk the lender faces if you default.
Find out how affordable home equity borrowing could be now.
How to borrow the most from your home equity
If you need to maximize your home equity borrowing, these strategies may help you access more funds:
Get a professional appraisal: It's possible to secure a no-appraisal home equity loan, but it may not be the best move. Home valuations from tax assessments or online estimators often undervalue properties, but a professional appraisal might reveal your home is worth more than you thought, instantly increasing your available equity.
Consider a cash-out refinance: Rather than a second loan, refinancing your entire mortgage might allow for higher total borrowing. Some cash-out refinance programs permit borrowing up to 90% of your home's value, which is higher than the typical equity loan limits, but be aware that you could be stuck with a much higher mortgage rate if you secured your original mortgage loan a few years ago when rates were closer to 3%.
Look into Federal Housing Administration (FHA) cash-out options: The Federal Housing Administration offers cash-out refinance loans that allow qualified borrowers to access up to 80% of their home's value, even with less-than-perfect credit scores.
Explore Veterans Affairs (VA) loans: If you're a veteran, a VA loan may allow up to 100% of your home's value in certain refinancing scenarios, essentially letting you extract all available equity.
Combine financing types: Some homeowners who need access to a large amount of funding use a combination of a home equity loan and an unsecured personal loan to meet their borrowing needs. While this means paying two different interest rates, it can bridge the gap when home equity alone isn't sufficient.
Wait for appreciation: If your borrowing needs aren't immediate, waiting for market appreciation or paying down more principal can naturally increase your available equity.
Make home improvements before applying: Strategic, high return-on-investment improvements that are completed before applying for financing can increase your home's appraised value, creating more equity to borrow against.
The bottom line
While it's not easy (or often possible) to get a home equity loan that's larger than your actual equity, there are ways to maximize the amount you can borrow. Before taking on additional debt, though, you need to carefully assess your financial situation and compare your different loan options. Whatever approach you choose, be sure to work with reputable lenders, compare multiple offers and read the fine print carefully — especially regarding interest rates, fees and repayment terms. Your home represents both financial security and personal stability, after all, so any borrowing decision should carefully balance your immediate needs with your long-term homeownership goals.
