How Much Can You Borrow With a Home Equity Loan?

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The soaring house prices have increased home equity in the US in the last several years. If you are looking into borrowing money, getting a home equity loan could be a more economical option compared to other financing methods. This is more like a second mortgage that allows you to borrow money based on your house value, depending on how much you have paid off. So, how much can you borrow with a home equity loan? Find out more below.

How to Calculate Your Home Equity

Achieve’s home equity loans allow you to take cash from your home by borrowing against the equity. You determine your home equity value by subtracting your house’s current market value and mortgage balance. In other words, it’s the portion of the house mortgage you have paid off. You receive a set amount of money that you will pay back in installments and a fixed interest over a predetermined period.

If you are considering getting an equity loan, start by finding out how much your home is worth. Get a home appraisal analysis from a professional. They will evaluate your house value based on its condition and comparative property value in your area. 

The Math is Simple

Subtract the mortgage you owe from your home’s current value to get equity. Most lenders will allow you to borrow between 80% and 85% of the equity you own. This makes an equity loan less risky since you get a lower loan than the money you have invested in the house. 

Still, it’s good to remember that your house is the collateral. So let’s say you have a house worth $300 000 and currently owe a mortgage of $100,000. In this case, the most a lender can offer you is 85% of $200,000 which is $170,000. 

Home Equity Loan Requirements

Banks and credit unions are some lending institutions that offer home equity loans. The interest rate on a home equity loan and the requirements vary from one lender to another. Here are some of the requirements. 

At Least 15% to 20% of Home Equity 

You will need 15% to 20% equity in the property to qualify for a loan. The more equity, the higher the amount you can borrow. That said, you can do a few things to improve your equity. One easy way to achieve this is by paying your mortgage faster. Any time you pay your initial mortgage, your home equity increases, and you can borrow more against it. Making home improvements like renovations may also increase your property value translating to higher equity. 

Good Credit Score

You will need a credit score between 620 and 680 to qualify for a home equity loan. A good credit score demonstrates your ability to pay loans on time, and you may get attractive interest rates. However, some lenders might still approve your loan even with bad credit, but you will have to pay higher interest rates. 

Lower Debt-to-Income Ratio

Some lending institutions require that you have a debt-to-income ratio of about 43% and below. To calculate your debt-to-income ratio, divide your monthly debt payments by your gross income. The lower your debt-to-income ratio, the higher your chances of getting a good equity loan. A higher DTI is an indicator of financial difficulties. So before applying for a house equity loan, try paying as much debt as possible, starting with high-interest loans. 

Proof of Income

Some lenders will evaluate your income to assess your ability to repay the loan. This will also help them determine the amount they can lend to you. 

Summing UP

If you are wondering how much you can borrow with a home equity loan, this guide should help you get an estimate. Once you calculate your equity, shop for lenders with the best interest rates and repayment terms. A home equity loan is an excellent source of funding for paying off high-interest debts or financing home improvements.