How much can you borrow with a home equity loan?

Whether your roof needs urgent repairs or you want to renovate your kitchen, a home equity home could help.

Home equity loans allow you to borrow against your home’s equity, giving you access to cash for repairs, renovations, or other projects.

The amount of money you can get from a home equity loan depends on various factors — your current home equity, debt-to-income ratio, and the lender you choose.

How does a home equity loan work?

A home equity loan enables you to borrow a set amount of money from a lender by using your home’s equity as collateral. Your home equity refers to the difference between your home’s current value and any current mortgage on the property. 

After you take out a home equity loan, your lender provides you with the loan proceeds in a lump sum. If your home is worth $300,000, and you still owe $130,000 toward your mortgage, you have $170,000 of equity. If you were looking to borrow up to 85% of your home’s value, you could take out a home equity loan for $125,000. 

Because your home is used as collateral to secure the home equity loan, interest rates are relatively low compared to other products like personal loans. Also, home equity loans typically come with a fixed interest rate, so you can know exactly how much you owe each month for the life of the loan.

Home equity loan vs HELOC: what's the difference?

Home equity lines of credit (HELOCs), like home equity loans, allow you to borrow money using your home’s equity as collateral. Unlike home equity loans, HELOCs are revolving lines of credit. That means borrowers can access funds as needed throughout the drawing period and only have to pay back what they spend. This can be helpful for longer-term projects with unknown variables. HELOC interest rates and payments are also variable. They can increase over time while home equity loan payments remain fixed.

Both options can provide funds needed to finance a project, and each presents unique advantages and potential drawbacks over the other. Be sure to compare rates and shop lenders to help determine whether a HELOC or home equity loan is right for you.

READ MORE: Home equity loan vs Home equity line of credit (HELOC)

How to determine home equity loan maximums

While most lenders won’t let you borrow more than 90% of your home equity, lenders weigh several other factors to determine the amount you ultimately receive. A couple of calculations are central to your home equity loan maximums: your loan-to-value ratio (LTV) and your combined loan-to-value ratio (CLTV).

The LTV compares your current mortgage amount and your appraised home value. If your appraised home value is $250,000 and you still owe $180,000 on your mortgage, you’ll calculate your LTV by dividing $180,000 by $250,000 and converting it to a percentage of 72%. 

Your CLTV ratio takes the calculation further by factoring in not only your first mortgage, but also any additional secured loans on your home, including a second mortgage like a home equity loan. So, if you take the example above but factor in an additional $30,000 loan, you’d calculate your CLTV by dividing $210,000 by $250,000 and converting the decimal to 84%. 

The lower your LTV and CLTV, the better. These percentages affect your maximum loan amount, interest rate, and overall eligibility.

READ MORE: What is a loan-to-value ratio and how is it calculated?

Other factors that determine how much home equity loan you can get

While your equity, LTV, and CLTV are the major determining factors for how much you can borrow on a home equity loan, lenders also consider your credit score, income, and debt-to-income ratio. Every lender weighs these factors differently, so it’s important to understand them before you apply for a loan.

Credit score

Your credit score is a three-digit figure based on your credit history that lets lenders know how likely you are to repay debts on time. The higher your credit score, the more likely lenders approve you for a loan. Discover Home Loans requires a credit score of at least 660 for any home equity loan, but requirements vary with other lenders.

Income

To apply for a home equity loan, you must show proof of income. Lenders want to ensure that you make enough money to repay the loan. Increasing your consistent income through a promotion or a second job can help improve your chances of receiving the loan terms you want.

Debt-to-income (DTI) ratio

You can determine your DTI ratio by dividing your monthly debts by your gross income. Student loans, auto loans, and credit cards count toward your monthly debt, but living expenses like groceries or utilities typically don’t. DTI limits vary across lenders and loans but paying down debts could help with eligibility.