How Much Equity Can You Borrow From Your Home? (2024 Guide) (2024)

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Max. Loan Amount $400,000

Max. LTV Ratio 95%

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Understanding Home Equity Borrowing

You can use home equity funds for nearly any purpose, such as home improvements, consolidating high-interest debt and paying for college. When it comes to borrowing equity from your home, there are three popular options:

Home equity loans: Home equity loans, or second mortgages, are generally fixed-rate installment loans secured with your home’s equity. Once you’re approved, a lender issues you a lump sum of money. You then repay the loan by making fixed monthly payments, plus interest, for up to 30 years.
Home equity line of credit (HELOC): A HELOC allows you to borrow against the equity in your home as needed during a draw period, generally lasting about 10 years. During this period, some lenders only require you to make interest-only payments, while others require you to repay a portion of the principal. Once the withdrawal phase ends, the repayment period kicks in, and you must repay the principal balance and interest.
Cash-out refinancing: A cash-out refinance involves taking out a new, larger loan with different rates and terms to pay off your existing mortgage. You then receive the difference between the new and old loan amount in cash at closing.

The advantage of using home equity financing is that the average home equity loan rate is typically lower than the average credit card rate or personal loan. But a major downside is that a lender can foreclose your home if you default.

How much you can borrow depends on your available home equity and other factors.

>> Related: HELOC vs. Home Equity Loan vs. Cash-Out Refinance

Calculating Your Home Equity

Home equity is the difference between your home’s current market value and your mortgage balance, including any outstanding home equity loans. To calculate your home’s equity, subtract your outstanding mortgage balance from the current market value of your home. For example, if your home is worth $500,000 and your mortgage balance is $400,000, you have $100,000 in home equity.

If you’re unsure how much your home is worth, consider using a free online home value estimator tool. But keep in mind that lenders may require you to get a professional home appraisal, while others may use an in-house software tool to determine your home’s value as part of its application process.

>> Related: Learn more about how to calculate your home equity

How Much of Your Home Equity Can You Borrow?

Most banks, credit unions, and online lenders allow you to borrow a certain portion of your home’s equity, not the entire amount. They’ll look at what you owe on your mortgage and compare it to the assessed value for what’s known as your loan-to-value ratio (LTV).

Using the example above, divide the mortgage balance ($400,000) by the home’s value ($500,000) to find your LTV: 80%. Put another way, you have 20% equity in your home, which might not be enough to qualify for a home equity loan, HELOC or cash-out refinance. The best home equity loan lenders typically look for an LTV of around 85%.

If you don’t have enough equity in your home to qualify for a home equity loan, paying extra on your mortgage may boost your future approval odds. Alternatively, you can have your home reassessed if you think its appraised value is too low.

Other Factors That Influence The Amount of Equity You Can Borrow

In addition to your LTV ratio, these factors can affect how much of your home’s equity you can borrow.

While some lenders have minimumcredit scorerequirements as low as 620 or below, others may require you to have stronger credit. The higher your score, the better your approval odds and chances of qualifying for a higher borrowing limit at a lower interest rate.

YourDTImeasures how much of your gross monthly income goes toward repaying debt. To calculate your DTI, divide your monthly debt by your monthly income. Lenders generally require you to have a DTI ratio of 43% or lower. The lower your DTI ratio, the better.

To measure your ability to repay the loan, lenders will require you to share financial information that proves you have a stable income, such as W-2s and recent pay stubs.

Eligibility requirements vary by lender. For example, some lenders may only allow you to borrow equity for certain purposes, such as making home renovations or consolidating debt.

What To Consider Before Borrowing From Your Equity

Before you tap the equity in your home, you should consider your financial goals and repayment abilities.

Here are some questions to consider before borrowing home equity.

Can you comfortably repay the loan?
If you encounter a financial setback, such as losing your job, would you be able to afford repayment?
Have you explored alternative lending options that don’t involve risking your home, such as a 0% APR credit card or an unsecured personal loan?
Do you mind waiting up to a month to receive funds?

If the answer is yes to all of the questions above, then borrowing home equity might be the right financial move for you. Proceed with caution though — only borrow what you can afford to pay back to minimize your chances of losing your home. You can also discuss your options with a credit counselor or financial advisor to help you make the right decision.

>> Related: Learn more about what to consider before tapping into your home equity

The Bottom Line

How much equity you can borrow depends on how much available equity you have in your home and various other factors including your DTI, income, credit score, the lender you apply to and your home’s value and current mortgage balance. You can tap your home’s equity in three main ways: a home equity loan, HELOC, and cash-out refinancing.

Although a home equity loan may be cheaper than alternative financing options, you should consider the risks before applying. For example, a lender can take your home if you default on the loan. If you need help deciding whether home equity financing is a good fit for you, consider contacting a licensed finance professional for advice.

Frequently Asked Questions About Equity Borrowing

Whether borrowing against the equity in your home makes sense depends on your unique financial circ*mstances and goals. For instance, tapping your home’s equity may be an OK financial move if you can comfortably repay the loan. But it wouldn’t make sense if you would struggle to repay the loan since defaulting means a lender could take your home.

It’s possible to borrow against your home’s equity without refinancing your existing mortgage loan. Home equity loans, home equity lines of credit (HELOCs), and home equity sharing agreements are financial products you can use to cash out some of your home equity while keeping your existing mortgage’s terms the same. A home equity sharing agreement allows you to tap your home’s equity in exchange for giving an investment company a certain percentage of your home’s future value.

While eligibility requirements vary by lender, you typically need at least 15% equity in your home, good credit, a low debt-to-income ratio and a reliable payment history.

The least expensive way to take equity out of your home varies by lender and individual factors, like your debt-to-income ratio (DTI), loan-to-value ratio (LTV) and credit score. To find the best deal that fits your budget and unique situation, compare rates, fees, eligibility requirements, and terms across as many lenders as possible. Some lenders may allow you to prequalify to preview rates and terms you might receive if approved. But note: prequalifying doesn’t guarantee approval.

Editor’s Note: Before making significant financial decisions, consider reviewing your options with someoneyou trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.

If you have feedback or questions about this article, please email the MarketWatch Guides team at [email protected].