How much home equity do you need to borrow from it?
Borrowing money against the equity in your home can be a great way to access funds for everything from home improvements to debt consolidation. Home equity products like home equity loans and home equity lines of credit (HELOCs) offer rates significantly lower than you'll find with credit cards or personal loans. And depending on how you use the funds, you might be able to deduct the interest during tax time.
But not everyone can borrow equity from their homes. One big determining factor is how much equity you currently have.
When you take out a home equity loan product, you offer your home as collateral. That means if you're unable to keep up with your loan payments, the lender can seize your house to recoup its money. If you don't have enough equity in your home, you're a riskier bet for lenders, and they're less likely to approve you.
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How much home equity do you need to borrow from it?
To qualify for a home equity loan or line of credit, most lenders require you to have at least 15% to 20% equity in your home. That means if your home is worth $300,000, you need at least $45,000 to $60,000 in equity.
However, your home equity amount is just the starting point. The actual amount you can borrow may vary from lender to lender and depends on a variety of factors, including your credit score, income and outstanding debt.
Of course, the more equity you have in your home, the better. You'll be more likely to be approved, you'll have higher chances of getting approved to borrow more — and you may get a lower interest rate.
Find out how much you could borrow from your home equity now.
How to calculate your home equity
To determine how much equity you have in your home, subtract your mortgage balance from your home's current market value.
For example, suppose your property's present market value is $300,000 and you still owe $200,000 on the mortgage. In this case, you would have $100,000 in home equity ($300,000 minus $200,000).
To convert your home equity into a percentage, divide the amount by your home's current market value and multiply the result by 100. So, in the example above, you would calculate:
100,000 / 300,000 = 0.33
0.33 x 100 = 33.33
In this example, you have about 33% equity in your home — more than enough to meet the 15% to 20% threshold.
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How much equity should you borrow?
Just because you can borrow a certain amount from your home's equity, that doesn't necessarily mean you should.
Remember that any amount you borrow must be paid back with interest, so you should borrow what you need and no more. And, since you're putting your home up as collateral, you must make sure you can afford to make these payments or you'll risk losing your house.
To calculate how much you should borrow, get specific about what you want the funds for, how much you really need and how payments will fit into your budget. Be realistic and honest with yourself to avoid finding yourself in a precarious financial position later.
The bottom line
If you don't have enough equity in your home to borrow against it, there are steps you can take to build more equity, including paying off more of your mortgage, making improvements that boost your home's value and waiting until your home appreciates.
If you do have enough equity to borrow against it, take the time to compare your options to identify the best home equity product for your needs. Then, research multiple options to find the best rate and terms available. Done right, borrowing from your home equity can offer a cost-effective way to finance any number of expenses.
