Start by reviewing how much equity you have in your home if you’re thinking about taking out a home equity loan. Then shop around to get the best interest rate and repayment terms for your needs. You can get a home equity loan from a variety of banks, credit unions, or lenders, but each may have its own maximum amount for how much you can borrow.
How Do Home Equity Loans Work?
A home equity loan is based on the amount of equity you have in your property. You’ll get a lump sum of money, so it may be wise to know how much you want to borrow before you apply for the loan. Home equity loans tend to come with fixed interest rates so the rate won’t change for the life of the loan. A home equity loan can be used for just about anything, but this type of loan is often used to help pay for repairs, home renovations, or upgrades. You can also use the money for personal reasons, like a wedding, vacation, or college education, and even for debt consolidation. A home equity loan is available for different types of properties. If you own a condo, a single family home, a multi-family home, or a different type of property, you may be able to borrow a home equity loan.
Home Equity Loan Borrowing Maximums
You can usually borrow up to 85% of your home equity, but the actual amount that you can borrow depends on your credit history, your income, and your home’s market value. Your loan-to-value (LTV) ratio is the key factor here. It’s the value of your mortgage compared to the market value of your home. The higher your LTV, the greater of a risk you are to lenders. This could hurt your chances of qualifying for a home equity loan or cause you to get a higher interest rate. Let’s say you own a home with a value of $330,000. You have $220,000 left to pay on your 30-year mortgage, so you have $110,000 worth of equity in your home. The most a lender might offer you on a home equity loan in this case is $93,500, or 85% of your $110,000 home equity. But that still depends on your credit and income. The lender may only approve you for a $60,000 home equity loan if your credit score isn’t the highest and other factors are against you. Now let’s say that your home is worth only $300,000 and you have $220,000 left on your mortgage. This means you have $80,000 in home equity. Your lender may approve you for a loan worth a full 85% of your home equity, $68,000, if you have an excellent credit score and your finances are in order. It all depends on your financial situation and the lender.
Other Home Equity Loan Requirements
You’ll want to check on a few other things before applying to borrow a home equity loan.
Your Credit Score
The higher your credit score, the more likely you are to qualify for the lowest interest rate available on a loan. A low credit score may hurt your chance of qualifying, or it could mean a higher interest rate and a lower loan amount if you do qualify.
The Loan Amount
Some lenders may have a minimum amount you must borrow. For example, a bank may have a minimum home equity loan requirement of $15,000—so you have to apply for a loan of that amount or more. If you don’t need much to cover the cost of your home improvements, wedding, or other financial expense, applying for the minimum may be a good idea. Other lenders might state a maximum loan amount in addition to the 80% or 85% cap. For example, NIH Federal Credit Union has a maximum home equity loan amount of $250,000. That amount could be 80% for some people. For others, it might be more or less.
Your Debt-to-Income Ratio
Your debt-to-income (DTI) ratio is your monthly gross income compared to your monthly debt payments. This may also influence your eligibility for a home equity loan. Lenders want to be sure that you can pay back the loan, even in the case of an emergency such as a job loss. The lower your DTI, the more likely you are to qualify for a home equity loan. For example, if your monthly income is $5,000 and your mortgage is $2,500 per month (and it’s the only debt you have), your DTI is 50%—your debt is 50% of your income.
Home Equity Loan vs. Home Equity Line of Credit (HELOC)
Both home equity loans and home equity lines of credit (HELOC) offer borrowing options, but they aren’t quite the same. Both have credit score requirements and each has its own purpose. A HELOC might be best for your circumstances if you have ongoing home repairs or renovations. A home equity loan might be right for you if you’re planning a major remodel and you know exactly how much the project will cost, A home equity loan can help you fund specific home renovations, repairs, or remodels, or you can use the funds to pay for other needs, such as a wedding, college education, or medical bills. Just remember that a lien will most likely be placed on your home and the lender could foreclose if you fall behind on payments. Make sure you can comfortably make the payments on your new loan before you complete an application.
