How Much Home Equity Can You Borrow?

That means you’re faithfully paying down your mortgage, and real estate values ​​in your area are steadily increasing. Thanks to unprecedented home price increases over the past few years, Americans have accumulated record levels of home equity, which is rentable ownership. You dream of leveraging the valuable value of your home to pay for big future expenses: major renovations or paying for your child’s college tuition.

Oh, you might be disappointed. Even if the value of your home increases, it won’t turn into cash right away. There’s often a big difference between the home equity you have and the home equity you literally have available. You might be shocked to find out how much you can actually get and how much you’ll pay to access it.

Let’s take a look at why you might not be able to tap into as much equity as you think, and how to figure out how much of your home equity you can actually borrow.

Why can’t we leverage more of our assets?

Total home equity is the market value of the home minus any mortgage payments. However, this amount is not the amount you can actually borrow with a home equity loan, home equity line of credit (HELOC), or cash-out refinance. The former is, in a sense, theoretical equity, the value of ownership on paper. The latter is what financial experts call “available capital” and will always be less unless you own your home outright.

Here’s how you run out of tappable assets:

you can’t rent everything

First, lenders will not allow you to borrow the full amount of your property. “It varies by lender, but generally the current valuation (of the home) 80% of the amount will be the maximum amount.” For small American banks. He added that some financial institutions may exceed this, but the standard is 80%.

In other words, you need to leave a certain amount of your assets untouched and at home, so to speak. Usually 20 percent. Suppose your house appreciates in value by $500,000 and you own it free and clear. Even if you have $500,000 worth of equity, your lender may limit your borrowing power to $400,000 and require you to leave $100,000 in the home.

Reasons why you can’t utilize all of your assets

Why would a lender limit the amount of equity available? It reduces risk for both them and you in case your home’s value declines. If you use all of your equity and your home depreciates due to an economic downturn or a decline in local real estate values, you could end up owing more than it’s worth. Commonly known as mortgage default, this is a precarious situation because you can’t sell your home for its current value without paying the difference to your lender.

Have a large mortgage balance

Your mortgage balance also affects the amount of capital available. When determining the amount of a home equity loan, lenders consider something called the loan-to-value (LTV) ratio, or the ratio of the size of the loan to the value of the property. The higher the LTV, the higher the risk for the lender, so lenders typically want the LTV to be no more than 80 to 85 percent. In effect, it’s the same as leaving 15 to 20 percent of your capital undeveloped.

There’s a catch here. When you apply for a home equity loan or HELOC, lenders don’t just consider what the LTV of the loan will be. They will also consider your mortgage. This is the total LTV (CLTV) of this all You can’t have more than 80% debt on your home.

For example, let’s say your home is worth $500,000 and you owe $250,000. This equates to a 50% LTV.

250,000 (mortgage balance) / 500,000 (house price) = 0.5 or 50%

Now let’s say you want to take out a $150,000 home equity loan. A $250,000 primary mortgage plus $150,000 equals $400,000. This is 80 percent of $500,000. So the CLTV is 80%.

$220,000 (mortgage balance) + $150,000 (home equity loan)) / $500,000 (home price) = 0.8 or 80%

Obviously, the higher the mortgage balance, the higher the CLTV ratio and the less available capital you have to borrow, and vice versa. Let’s say you want to borrow $50,000 for a home equity loan. If your home is valued at $350,000 and your mortgage balance is $250,000, that means you have $100,000 in equity. Enough for loans, right? Unfortunately, this is not the case. A $250,000 mortgage balance and a $50,000 home equity loan add up to $300,000, or a CLTV of about 86 percent, which is too high for most lenders.

For this reason, home equity loans are often most effective for homeowners who have a well-termed mortgage and have a significant amount of equity. Many financial institutions insist that HE loan and HELOC applicants own at least 20 percent of their home outright.

If you have multiple homes or plan to use the equity in your first home to purchase a second home, some lenders will consider the CLTV of all your properties combined. says Sathyan Merchant, senior vice president of auto and home loans. TransUnion. “In extreme cases, you might have a 50 percent loan-to-value on one property, but you could be 120 percent overleveraged on another,” Merchant says. “So it’s very important for the lender to know the total loan-to-value of all my properties,” he added.

Your home is worth less than you think

Many rosy home equity forecasts fall short for another reason: overvalued homes.

All home equity calculations and home equity calculators start with the value of your home. There are many online home price estimators, but their accuracy is often questionable, and they are just estimates anyway. When deciding on a loan, lenders request a home appraisal and use the value determined by the appraiser. “The bottom line is, if your home’s appraised value is lower than you think, there’s less money available to you,” Haney says. “You may have wanted $100,000, but you may only get $70,000.”

As you and your property get older, they tend to be undervalued. A 2023 study by the Federal Reserve Bank of Philadelphia found that applicants are more likely to be denied due to their age and “insufficient collateral” (where the appraised value of the property is less than the loan amount requested and cannot be financed). There is said to be a direct correlation between them. Pay off your Refi or home equity loan.

lack of finances

There’s another problem here. You won’t be able to leverage your home equity because you won’t qualify for a loan.

As with your first mortgage application, lenders have financial requirements to borrow against your home equity. “Even if someone has a lot of equity in their home, lenders generally aren’t willing to lend based solely on equity,” Haney says. It also takes into account factors like your credit score and debt-to-income (DTI) ratio. In addition to these variables, your income and CLTV all affect how much a lender will lend you and how they determine the interest rate they’ll charge you, Merchant explains.

Home equity loans or HELOCs can be especially difficult to obtain than primary mortgages. In fact, more than 53 percent of HELOC applications were denied in the first quarter of 2024, according to Mortgage Disclosure Act data. Lenders typically require a minimum credit score of 680, and the best interest rates are reserved for lenders with credit scores of 740 or higher.

At first glance, cash-out refinances may seem easy to qualify for, with minimum credit scores as low as 620. However, cash-out refinances typically require more money, a longer and more difficult underwriting process, and may qualify for more conditions. They’re hard to come by, explains Greg McBride, chief financial analyst at Bankrate. In fact, 21 percent of cash-out refinance loan applications were denied in 2023, according to Mortgage Disclosure Act data. More than 28% were withdrawn or left unfinished.

Examples of how available housing equity decreases

Let’s say you own a home that you think is worth $400,000 and your main mortgage balance is $250,000. This means you have $150,000 in equity, which is 37.5% of your home’s value. But don’t think this means you have $150,000 to play with. Or it could be $120,000 (assuming you keep your 20% equity).

Remember CLTV, the loan-to-value ratio? Let’s assume your lender requires that your debt be no more than 80% of your home’s value, or $320,000. You already owe $250,000 on your mortgage. So if you subtract your current mortgage from your maximum CLTV of $320,000, you get:

400,000 x.8 = 320,000 – 250,000 = 70,000

This brings the maximum amount of home equity available to you to $70,000.

When you apply for an HE loan or HELOC, your lender will order a valuation of your home. If you have an appraised value of $400,000 or more and a good financial profile, you have a good chance of getting approved for a $70,000 loan.

But let’s say the appraised value reverts to a lower value of $370,000. If your mortgage balance is $250,000, your remaining equity is $120,000. You must retain 20% of the equity in your home ($74,000), so you only have $46,000 available.

Finally, don’t forget closing costs (yes, these out-of-pocket upfront costs also occur with home equity financing). Depending on the value of your mortgage, a cash-out refinance that replaces your primary mortgage with a new, larger mortgage has closing costs that can amount to 2 to 5 percent of the loan principal. For a $320,000 loan ($250,000 balance plus $70,000 in cash to withdraw), costs can range from $6,400 to $16,000.

Alternatively, a home equity loan or HELOC has lower upfront fees. However, the interest rate is higher than that of a cash-out refi. The monthly payment on a $70,000 20-year home equity loan at 9.1% is currently $634.32. If you don’t have income to qualify for this payment, your loan amount will be reduced or your loan will be denied.

How to leverage more home equity

How can I increase the amount I can borrow? It may be difficult, but there are ways.

• Get another rating: If you’re denied the loan amount you want because your home’s appraised value is low, you may be able to appeal the loan and have the lender reappraise your home. Review the appraisal report carefully and look for errors or missing information. Is there an error in the area description? Does it overlook the bedroom? Do you use older comps? Low ratings are usually not the rater’s fault, McBride explains. “Having said that, unreasonably low ratings should be challenged. Mistakes and oversights do happen from time to time,” he added. You can also request and pay for a second appraisal. However, there is no guarantee that you will get better results.
• Try another lender: Lenders may have similar guidelines but prioritize different loan types depending on their business strategy. “Banks tend to constantly evaluate where to grow and where to exit,” Merchant says. Smaller banks and lenders may be more receptive because they want to offer more specific home equity products, he explains. Other financial institutions have higher borrowing standards. For example, Discover offers home equity loans with up to 90 percent CLTV, and Lower.com offers HELOCs with up to 95 percent. Of course, such products may be more difficult to qualify for or come with higher interest rates.

Increase your home equity borrowing power

If you can’t get a big enough mortgage right away, you may need to wait. And think long-term. Why not try some renovations to increase the value of your home? Focus on small, affordable improvements like garage door upgrades, improving curb appeal, and small but important repairs. It’s amazing what a new coat of paint can literally do. All these efforts can add up. When applying, don’t forget to document them and provide the evaluator with a list of areas for improvement.

Still, home value increases are influenced more by real estate market trends than by consumer decisions, Merchant explains. “What consumers have a little more control over is their own credit,” he says. “One concrete thing consumers can do is make sure they take the right steps to manage their credit in order to get their credit score as high as possible.”Thus, strengthen your financial profile and pay off debt as much as possible. Please.

And grow your wealth starting with your home. The simple truth is, if you want more equity available, you can create and make more equity available by paying a mortgage. The amortization schedule of a mortgage means that the longer the term, the more equity is generated with each payment. If you can pay more each month or make additional payments, the value of your ownership will increase faster.

Final conclusion of borrowing against home equity

So how much mortgage can your equity generate? It could be much less than you expected for a variety of reasons. There is a big difference between theoretical assets and tappable assets. If you can’t borrow the amount of home equity you want now, you may be able to do so later. Take the time to improve your credit, pay off debt, and upgrade your home. When you’re ready, research the best mortgage lenders to find the product that’s right for you.

Frequently asked questions about leveraging housing assets