How much can I borrow with a home equity loan?
Home equity loans are an excellent option for homeowners who need additional funds for a home project or who are looking to consolidate debt, and want to avoid the high interest rates that come with credit cards and personal loans. A home equity loan allows you to borrow against the value you've built in your home to finance a wide variety of expenses.
But to decide whether a home equity loan is right for you, one of the first things you need to know is much you can borrow.
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How much can I borrow with a home equity loan?
The amount of money you can borrow with a home equity loan depends on several factors.
How much equity you have in your home
Your current amount of home equity is the most significant factor that determines how much you can borrow with a home equity loan. Your equity is the difference between your home's current market value (as determined by an appraiser) and your outstanding mortgage balance.
You can calculate your home equity by subtracting your mortgage balance from your home's value. For example, if you have a home worth $500,000 and still owe $300,000 on your mortgage, you have $200,000 in equity.
Lenders typically allow you to borrow up to 80% of your home equity. So, if you have $200,000 in equity, you may be able to access up to $160,000 with a home equity loan.
Your credit score
Your credit score is another crucial factor lenders look at when considering how much you can borrow with a home equity loan. Like with any new loan, lenders want to see that you have a good credit history and will repay them on time.
In most cases, you'll need a credit score in the mid-to-high 600s to qualify for a home equity loan. The higher your score, the better the terms and borrowing options you'll receive. So the largest loan amounts typically go to applicants with the strongest credit. If your score is on the low end, there are steps you can take to improve it and improve your chances.
See today's home equity loan rates here.
Your debt-to-income ratio
Your debt-to-income (DTI) ratio indicates how your monthly expenses compare to your monthly income. Lenders use this to estimate your ability to make your monthly loan payments. If your expenses take up too large a percentage of your income, you won't be able to borrow as much — if you're approved for a loan at all.
Typically, lenders require a DTI under around 50%. The lower your DTI, the more you can borrow and the better the terms (including interest rate) will be.
The lender's guidelines
Lastly, the specific lender's guidelines are another factor that determines how much you can borrow. Every lender has different guidelines borrowers must meet to qualify for a loan. They may base their decision on different factors in addition to the ones listed above, such as income and job stability. That's why it's important to shop around and compare different lenders before you lock in any new loan, since you may qualify for better terms with one over another.
Before you apply for a loan, make sure to read and understand the lender's guidelines to increase your chances of securing the funds you need.
The bottom line
A home equity loan can be a great solution to your financial needs and a valuable resource for homeowners. However, it's important to determine how much you can borrow before you decide if this type of loan is right for you, as this can impact how valuable a home equity loan may be. By understanding factors like the amount of equity you have in your home, your credit and other lender guidelines, you can better estimate this number so you can make an informed decision.
Find out how much you can borrow with a home equity loan by checking out your options here!
