Home equity lines of credit (HELOCs) are useful tools for consolidating debt and covering the costs of home repairs and renovations. Whether you should use one for your own financial goals, though, depends on just how much cash you need — and the amount you qualify to borrow. How much could you potentially get with a HELOC? Here’s how to run the numbers.
The amount of money you can get from a HELOC depends on the maximum combined loan-to-value ratio that your lender allows. Your CLTV ratio refers to the amount you owe on the house compared to its total value. If you’ve taken out multiple loans on the property, you include the debt from all of those loans when calculating your CLTV.
Generally speaking, most companies let you borrow between 80% and 85% of your home value — minus your current mortgage balance.
So, let’s say a lender allows for 85%. To calculate what you could potentially borrow, you’d use this equation:
(Home value x 0.85) – Mortgage balance = Amount you can borrow
Example: Say you have a home valued at $350,000 and a current mortgage balance of $100,000. If your lender allows you to borrow up to 85% of your home value — minus your outstanding balance — then you would be able to borrow up to $197,500.
Using the above equation, the math would look like this: ($350,000 x 0.85) – $100,000 = $197,500. Now, let’s break that down:
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$350,000 x 0.85 = $297,500
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$297,500 – $100,000 = $197,500
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Total amount you could borrow through a HELOC: $197,500
Many HELOC lenders have online calculators you can use if you don’t want to do the math on your own. These can give you a rough idea of how much you might be able to borrow from that particular company.
Your CLTV ratio isn’t the only factor a lender considers when determining the amount you can borrow with a HELOC. They will also factor in the following:
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Home’s appraised value: The value of your home matters, as it directly ties into how much equity you have and, therefore, how much you can borrow. The higher your home’s value, the more you can potentially qualify to borrow with a HELOC.
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Debt-to-income ratio (DTI ratio): Your DTI ratio reflects how much of your income is going toward debt payments. HELOC lenders generally require you to have no more than a 40% to 50% DTI ratio, though the lower your ratio, the more money you may be able to borrow.
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Credit score: Mortgage lenders use your credit score to assess how risky a borrower you are. A higher score indicates you make payments on time and are good at managing your money, while a lower score communicates the opposite. You may be able to borrow more or get a better HELOC rate with a higher credit score.
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Income: Lenders want to feel confident you can afford your monthly HELOC payments, both now and in the future. For this reason, how much you make — and how consistent your income is — can also impact your borrowing power.
Lenders often have maximum line of credit amounts that play a role. For example, PenFed Credit Union HELOCS have a maximum borrowing limit of $500,000.
If you’re worried you won’t qualify for a HELOC, or that you can’t borrow the amount you need, there are other financing options to consider. One of the following could be a better fit:
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Home equity loans: Home equity loans are similar to HELOCs, except that instead of ongoing access to a credit line, you receive a one-time, lump-sum payment. Home equity loans typically have fixed interest rates, whereas HELOCs charge variable rates.
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Reverse mortgages: These are loans available to homeowners aged 62 and older (sometimes 55, depending on the lender). Instead of making payments to your lender, the company pays you out of your home equity — as a monthly payment, a lump sum, a credit line, or even as a combination of all three.
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Cash-out refinancing: With this tool, you replace your current mortgage loan with a larger one and receive the difference in cash. Please note that refinancing will replace the rate and term of your loan, which may not be advisable if you have an ultra-low interest rate.
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Home equity sharing agreements: These allow you to get a lump- sum payment in exchange for a portion of your home’s future value. They require no monthly payments and aren’t due until the end of the term or when you sell your house.
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401(k) loans: If you have a 401(k) retirement account, you may be able to borrow money from it using a 401(k) loan to buy a house. This gives you a lump sum of cash.
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Personal loans: These loans may also be an option, but because they are unsecured loans (meaning there is no collateral attached to them), they will usually have higher interest rates than other financing strategies.
MORE: See our top picks for the best home equity loan lenders.
It depends on your lender, but generally speaking, you can usually borrow from 80% to 85% of your home’s value minus any mortgage balances you have against the house. So, let’s say your house is worth $300,000, and you still owe $100,000 (meaning you have $200,000 of equity). You can borrow between $140,000 and $155,000 with a HELOC.
The downside of a HELOC is that it typically comes with a variable interest rate, which can make budgeting and planning difficult. They also use your home as collateral, putting it at risk of foreclosure if you don’t make your payments.
In most cases, you will need a home appraisal before you can get a HELOC. The lender uses the appraisal to determine your home’s value and, subsequently, how much equity you have to borrow from.
Yes, you can pay off your HELOC balance early, which could save you interest costs. Just make sure your lender doesn’t charge any prepayment penalties before doing so.
Laura Grace Tarpley edited this article.
