How much equity can you borrow with a HELOC?
American homeowners are sitting on a significant amount of home equity in today's market, with the average homeowner having approximately $330,000 in equity right now. This substantial cushion provides opportunities for homeowners to access affordable financing through home equity products, like home equity loans and home equity lines of credit (HELOCs), which have become increasingly attractive as other borrowing options grow more expensive.
The stark contrast in borrowing costs compared to other options makes home equity financing particularly appealing right now. For example, personal loan rates have jumped significantly over the last couple of years, and rates on this type of borrowing now average 12.31% — a sharp increase from the average rate of 8.73% in May 2022. Credit card rates have climbed even higher and are sitting at a record-breaking average of over 23%. These high rates have led many borrowers to look for more affordable alternatives.
Against this backdrop, home equity borrowing stands out as one of the most cost-effective financing options available. Home equity loan rates currently average 8.40%, while HELOCs offer similar affordability at an average rate of 8.56%. But while home equity borrowing is one of the best borrowing routes to take right now, there are limits to how much you can borrow. So how much of your home equity can you tap into with a HELOC? That's what we'll explore below.
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How much equity can you borrow with a HELOC?
Most lenders allow homeowners to borrow up to 85% of their home's value across all mortgage loans combined, including both their primary mortgage and any home equity borrowing. This is known as the combined loan-to-value ratio (CLTV). To determine how much equity you can access through a HELOC, you'll need to subtract your current mortgage balance from 85% of your home's value.
For example, consider a homeowner who has the average amount of equity ($330,000). If their home is worth $500,000 and they have a remaining mortgage balance of $170,000, here's what that calculation would look like:
- Maximum borrowing potential (85% of $500,000) = $425,000
- Subtract current mortgage: ($170,000)
- Available equity for HELOC = $255,000
As a result, these numbers can vary significantly based on your specific situation. Here are a few more examples to consider:
For a $750,000 home with a $400,000 mortgage balance:
- 85% of value = $637,500
- Minus mortgage = $237,500 available for HELOC
For a $300,000 home with a $150,000 mortgage balance:
- 85% of value = $255,000
- Minus mortgage = $105,000 available for HELOC
It's important to note that while these calculations show the theoretical maximum, lenders will also consider other factors like your credit score, income and debt-to-income ratio when determining your actual HELOC limit. As with most other types of borrowing, the better your full financial picture is, the more flexibility you'll generally have in terms of the amount you're approved to borrow.
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Can I borrow more with a home equity loan?
While home equity loans and HELOCs are structured differently, they typically have comparable borrowing limits. Both products generally adhere to the same 85% CLTV maximum that lenders use to protect themselves against default risk. However, individual lender policies can vary significantly.
For example, some lenders may offer more conservative limits, only allowing borrowing up to 80% CLTV. Others might extend borrowing up to 90% CLTV for highly qualified borrowers with excellent credit scores and strong income profiles. The key difference between these products isn't in how much you can borrow, but rather in how you access the funds and repay them.
When choosing between a HELOC and a home equity loan, the decision should focus on your specific needs rather than trying to maximize borrowing capacity. A HELOC comes with a variable rate and offers flexibility with a revolving credit line you can draw from as needed, while a home equity loan provides a lump sum with fixed monthly payments. Both options can provide access to roughly the same amount of equity, just with different terms and repayment structures.
The bottom line
Regardless of which option you choose and how much you borrow, it's important to remember that borrowing against your home equity is a significant financial decision. While current market conditions make home equity borrowing particularly attractive from a cost perspective, it's still crucial to have a solid plan for using and repaying the funds. After all, your home serves as collateral for these loans, making it crucial that you borrow responsibly and stay within your means to avoid putting your property at risk.
