A home equity loan is a type of financing option that allows you to borrow money based on how much equity you have in your home. You can use a home equity loan for repairs, renovations, and more, but your loan will have a maximum.
If you’re thinking about taking out a home equity loan, start by reviewing how much equity you have in your home. 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 one may have its own maximum loan amount.
- A home equity loan is a type of second mortgage that lets you borrow money based on how much equity you have in your home.
- Home equity is the difference between what you owe on your mortgage and what your home could sell for in the current market.
- The maximum amount you can borrow with a home equity loan depends on how much equity you have in your home. You can usually borrow as much as 80% or 85% of the equity in your home, depending on a few different factors.
- You can use a home equity loan for home repairs, college costs, emergencies, and more.
What Is a Home Equity Loan?
A home equity loan is a loan that is based on the amount of equity you have in your home. With a home equity loan, 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, which means the interest rate won’t change for the life of the loan.
A home equity loan can be used for just about anything, but many times, this type of loan helps pay for repairs, home renovations, or upgrades. You can also use it for personal reasons, like a wedding, vacation, or college education, and even debt consolidation.
A home equity loan is a type of second mortgage. Your home is used as collateral to secure this type of loan. If you fall behind on paying it back, your lender could foreclose on your home.
Home Equity Loan Maximums
You can’t borrow as much as you want with a home equity loan. You can usually only borrow up to 85% of the equity you have in your home. However, even with that 85% cap, the actual amount that you as an individual can borrow depends on your credit history, income, and your home’s market value.
For example, let’s say you own a home that is worth $330,000. You have $220,000 left to pay on your 30-year mortgage. This means you have $110,000 worth of equity in your home. If you’re looking to take out a home equity loan, the most a lender might offer you is $93,500 (85% of your $110,000 home equity). However, that still depends on your credit history and income. If your credit score isn’t the highest and other factors are against you, the lender may only approve you for, say, $60,000 in a home equity loan.
Now let’s say you bought a home in the same way, but the home is worth only $300,000. You have $220,000 left on your mortgage, which means you have $80,000 in home equity. If you have an excellent credit score and your finances are in order, your lender may approve you for a loan worth a full 85% of your home equity: $68,000. It all depends on your financial situation and the lender.
Other Home Equity Loan Requirements
Aside from owning a home, you’ll need to check on a few other things before applying for a home equity loan.
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.
Good or excellent credit—a FICO score of 670 or higher—may make it easier to qualify for a home equity loan. All lenders have their own requirements for eligibility, though, so review your credit report for free to make sure errors are removed and it’s in good shape before you apply.
Loan-to-Value (LTV) Ratio
Your loan-to-value (LTV) ratio is the value of your mortgage compared to the market value of your home. The higher your LTV, the bigger 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. You can calculate your LTV by dividing your mortgage’s principal balance into your home’s market value. For example, if you have a mortgage balance of $200,000 on a home worth $300,000, your LTV would be about 67%. Lenders will likely require you to have an LTV below 80% or 85% before you apply.
Some lenders may have a minimum amount you must borrow. For example, in October 2021, U.S. Bank had a minimum home equity loan amount of $15,000. Other lenders may 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.
Your Debt-to-Income Ratio
Your monthly gross income compared to your monthly debt payments is what makes up your debt-to-income (DTI) ratio. This may also influence your eligibility for a home equity loan. Lenders want to make sure you can continue to 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.
While home equity loans are backed by the collateral of your home, there are several factors that can influence how much you can borrow and who will lend to you. Compare as many lenders as possible before applying for a home equity loan.
Home Equity Loan vs. Home Equity Line of Credit (HELOC)
While both home equity loans and home equity lines of credit (HELOC) offer borrowing options, they aren’t quite the same. Here’s how they are different.
|Home Equity Loan||Home Equity Line of Credit (HELOC)|
|One lump-sum amount of money||A line of credit|
|Fixed interest rate||Variable interest rate|
|Fixed monthly payments for the life of the loan||Minimum monthly payments during the draw period; potentially higher monthly payments during the repayment period|
|Loan term is set from the beginning (months or years)||Borrow period is typically about 10 years, and the repayment period is usually 10 or 20 years|
|May qualify for a tax deduction on interest if used for home improvements||May qualify for a tax deduction on interest if used for home improvements|
Both have credit score requirements and each has its own purpose. If you have ongoing home repairs or renovations, a HELOC might be best for your circumstances. If you’re planning a major remodel and know exactly how much the project will cost, a home equity loan might be right for you.
The Bottom Line
If you have enough equity in your home—usually 20% or more—you may be able to apply for a home equity loan. You can usually borrow up to 85% of the home equity you have, although some lenders may have lower maximums. A home equity loan may 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 if you fall behind on payments, a lien could get placed on your home and the lender could foreclose on your house. Make sure you can comfortably make payments on your new loan before completing an application.
Frequently Asked Questions (FAQs)
Is there a minimum amount for a home equity loan?
Each lender has its own requirements and terms for home equity loans, so the minimum loan amount may vary. Vet each lender before applying to make sure it’ll meet your needs. Additionally, you may need to have a minimum amount of equity in your home in order to qualify.
How long does it take to get a home equity loan?
It can take a few weeks to process a loan request. When you applied for your mortgage, an underwriter had to verify and review all your financial documents. A similar process is done for a home equity loan. You may also need to wait three days for the funds to be available.
Where can you get a home equity loan?
You can get a home equity loan through a bank, credit union, or online lender. It’s a good idea to check out many different offers to compare each one. See which lender offers the lowest interest rates, fewest fees, and best repayment terms. Make sure you’re eligible before applying and if you aren’t eligible on your own, try to find a reliable co-signer to help you qualify.