Home equity loans give people in need of money the chance to borrow a lump sum of cash using their home as collateral. How much depends on a variety of factors, including the property’s value, the amount still owed on the mortgage, the applicant’s income and credit history, and each lender’s appetite for risk.
- Most lenders do not dish out home equity loans worth more than the applicant’s homeownership stake because that would leave a chunk of the loan potentially unsecured.
- Though each lender is free to choose, many won’t lend more than 80% of the homeowner’s interest in their property.
- The better your credit history and income, the higher the percentage of your home equity you’ll likely be able to borrow.
- High loan-to-value (LTV) home equity loans tend to be much more expensive.
How Much Equity Do You Have in Your Home?
The amount you’re able to borrow with a home equity loan generally depends on how much equity you have in your home. Home equity is basically your home’s value minus any liens attached to it. In other words, it is the ownership stake that you’ve built in the property so far.
So, for example, if your home is appraised at $400,000 and you still owe $250,000 on your mortgage, then you have $150,000 equity in the property. That $150,000 represents 37.5% of your home’s current value, with the rest still owned by the bank.
Home equity rises in two ways: when you pay down your mortgage and when your home increases in value. Equity can also fall if the principal isn’t paid back, as is the case, for example, if you have an interest-only mortgage and the property’s selling price depreciates.
What’s the Maximum Amount You Can Borrow?
Bigger loans are generally more lucrative to creditors. However, larger sums also come with a higher risk of default.
Most lenders do not dish out home equity loans worth more than the applicant’s homeownership stake because that would leave a chunk of the loan potentially unsecured. A line needs to be drawn somewhere and, in many cases, the magic number is 80. Though each lender is free to choose how high to go, many won’t lend more than 80% of what the homeowner’s interest in their property is worth.
The 80% limit
A limit of 80% isn’t a guarantee but rather the maximum that can generally be borrowed, including the amount you may still owe on a mortgage. How much the lender is actually willing to give you depends on your individual credit history and income.
Most lenders won’t let homeowners borrow more than 80% of the value of the equity they’ve built in their property.
For instance, if your home is appraised for $350,000 and you still have a $180,000 mortgage on it to pay off, your stake in the property, or equity, is worth $170,000. Should the lender apply an 80% cap, that effectively means it would lend you up to $136,000.
That’s the best-case scenario. If your monthly income doesn't leave much room for error—or your credit score isn’t high due to a patchy track record of paying back debts—the maximum you may be offered could be much less.
Some lenders might also implement a dollar limit. For example, NIH Federal Credit Union won’t sanction a home equity loan above $250,000.
Why Are Lenders Generally So Cautious?
Why do lenders impose such limits? Mainly to cover their backs.
With a home equity loan, a house serves as collateral, meaning the lender can sell it to recoup some or all of its losses if the borrower is unable to keep up with payments. That added protection is what prompts the lender to make the money available in the first place. It steadily begins to erode as the size of the loan grows relative to the value of the borrower’s ownership stake in the property.
Let’s look at an example. Imagine you were lent $200,000 against the $170,000 of equity held in your home. This loan is extremely risky to the lender. In the event of early default, it could only recoup about $170,000 by pursuing foreclosure, forcing it to use other costly methods to extract the rest of the money from you, assuming the home equity loan is a recourse debt.
High Loan-to-Value Home Equity Loans
There are a handful of lenders out there willing to lend homeowners more. However, for the reasons outlined above, such loans tend to be offered only to applicants with an excellent credit history and a consistent level of disposable income that's comfortably above the monthly repayment obligations.
High loan-to-value (LTV) home equity loans also tend to carry higher interest rates to compensate the lender for the extra risk it is assuming. There are no guarantees. Even if the applicant has a good income and a stellar history of honoring debts, a job loss or large unexpected expense could change all of that. There is also a danger, however rare it may seem, that the house depreciates in value, which would lower the amount the lender can retrieve through foreclosure proceedings.
These various risks prompted the Federal Deposit Insurance Corporation (FDIC) to advise lenders offering loans with LTVs exceeding 90% to tack on mortgage insurance and other forms of protection. Usually, it is the borrower who is expected to foot the bill for these safeguards, making the already costly high-LTV home equity loan even more expensive.
When you borrow a sum worth more than 80% of your ownership stake in your home, interest rates tend to be much higher to compensate the lender for the added risk.
When Homeowners Could Get More Than Their Existing Equity
Some home equity loan lenders are willing to go higher than others. However, virtually none are prepared to lend out more than a homeowner’s existing equity.
The only potential exception to this rule is in the unlikely scenario that you bought a house without putting money down or paying back any of the principal, and it rapidly increased in value. Say, for example, you purchased your house eight years ago for $150,000 and it’s now worth $200,000. Despite not paying any of the loan back, and therefore, in theory, not yet building any equity, you might qualify for a home equity loan based on the property’s appreciated value.
Can I Borrow More Than My Equity?
Getting a lender to agree to lend you more than what your ownership stake in your home is worth won’t be easy. Many lenders refuse to lend more than 80% of the value of the applicant’s home equity. Some are willing to go higher but seldom beyond 100%.
How Much Equity Do I Have if My House Is Paid Off?
If there are no outstanding mortgages or liens on your home, it is 100% owned by you. In other words, you have 100% equity in your home.
How Can I Borrow More From a Home Equity Loan?
If you want to borrow more than lenders are willing to lend you, you’ll need to pay off more of your mortgage, hope your home increases in value, or boost your income and credit score.
The Bottom Line
Credible lenders would generally never sign off on a home equity loan for more than the applicant’s existing equity in their property because that would result in a chunk of the loan being unsecured and harder to collect in the event of default. And if the opportunity did somehow present itself, the amount you would be charged in interest and other expenses could force you to have second thoughts, anyway.
Before getting frustrated, homeowners in need of cash should realize that lender-imposed limits also work in their favor. Take out a loan that’s worth more than your ownership stake in your home and you could lose much more than the roof over your head.