Home equity loans and HELOCs use the equity you own, and these loans are secured against the value of your home. Lenders can offer competitive interest rates, usually close to those of first mortgages. Just as banks or credit unions would with first mortgages, lenders will underwrite the loan based on the value of your equity.
The maximum amount a lender will offer you is typically 80% to 85% of your combined loan-to-value (CLTV) ratio, a measure of the difference between the value of your house and how much you are borrowing.
Key Takeaways
- Home equity loans are secured against a home so the amount borrowed is limited to the value of the equity in the home.
- Homeowners can calculate equity by subtracting the amount they owe on their first mortgage from their home's value.
- Lenders may lend up to 85% of a home's value.
Lending Limits
Home equity loans use your home as collateral. When you apply for this kind of loan, your lender will place a second lien on your home, giving them rights to your home along with the first mortgage lien if you fail to make payments. Home equity loans are a low risk for lenders if your loan is less than the money you have invested in your home.
Lenders have different guidelines to determine how much they lend. Typically, your CLTV ratio, the ratio of the loan amount to the equity you own in your home, is commonly used to determine the amount.
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Home Equity Loan Example
Many lenders have a maximum CLTV ratio of 80%. If your home is worth $300,000 and you have no existing mortgage, the maximum you could borrow would be 80% or $240,000. However, if you currently owe $150,000 on your first mortgage, subtract this from the total amount. $240,000 minus $150,000 is $90,000. This would be your maximum loan amount.
Eligibility for a home equity loan also depends on your employment history, income, and credit score. These factors may also affect the interest rate you are offered on your loan.
The maximum amount you can borrow on a home equity loan depends on how much equity you own and your credit score and income.
Costs and Terms
There are other costs and fees to consider when applying for a loan. Borrowers who take out a home equity loan pay closing costs just as they did with a first mortgage. These costs include loan processing fees, origination fees, appraisal fees, and recording fees.
You can pay these costs upfront with cash, or reduce the value of the loan you receive to cover the fees. Additionally, lenders commonly require borrowers to pay points, where each point is equal to 1% of the loan value. On a $100,000 loan, one point equals $1,000.
What Is the Minimum Home Equity Loan Value?
Home equity loans may also have a minimum limit. Though some lenders will extend loans for $10,000, many won’t give you one for less than $35,000.
What Is a Combined Loan-to-Value Ratio?
This is how banks and credit unions express the maximum amount they can lend on home equity loans. Typically, lenders can offer 80% or 85% of the value of the equity you hold.
Am I Eligible for a Home Equity Loan?
To qualify for a home equity loan, you must own a significant amount of equity in your home, and most lenders evaluate a borrower's credit score and income level.
The Bottom Line
Home equity loans are secured against a home, so homeowners cannot borrow more than the value of the equity they hold in their home. Equity equals the value of your home minus the amount owed on a first mortgage plus other liens. Lenders may lend you up to 85% of this value.
