The answer to this question depends on a variety of factors including your lender's guidelines, your home's value and the amount of your first mortgage loan.
The Minimum Amount
Before we get started with how much you can borrow with a home equity loan, you should know that there is usually a minimum amount that you must borrow. This amount varies by lender but it is usually set at $10,000. There is a lot that is involved on the lender's side to secure a home equity loan, therefore a minimum loan amount is in place to ensure the loan is a good addition to their portfolio based on the amount of time involved in processing and servicing.
Calculating Your Home Equity Loan AmountMany lenders will not lend you more than the value of your home and most are comfortable in the 80-90% range. This percentage represents the total amount of debt you can have in relation to the value of your home. For instance, let's assume the lender's guideline states the loan to value (LTV) will not exceed 80%. If your home is valued at $250,000, then your maximum indebtedness on your home cannot exceed $200,000 ($250,000 x 80%). If your first mortgage has a balance of $150,000, then you would be eligible for a $50,000 home equity loan.
This is another factor that can vary by lender.
Home value x LTV % = maximum indebtedness
Maximum indebtedness - balance of existing loans = eligible home equity loan amount
Let's take the same scenario and look at the difference if the lender's guideline states a 90% LTV. In this case, total indebtedness could not exceed $225,000, which would make you eligible for a $75,000 home equity loan.
Also keep in mind that the value of your home will be based on the latest appraisal. If your last appraisal is more then a few years old or you are in a seller's market, it may be worth the extra money to have your home appraised again. Some lenders will agree to do an in-house appraisal to save you this fee. This simply means someone from the bank will go out to appraise your home, usually based on recent comparables. Because they are not a certified appraiser, it is usually a more conservative value.
Risks of Financing More Than 100%
Some lenders offer a home equity loan up to 125% of the value of your home. In the above scenario, this would enable you to have a total of $312,500 in debt secured by your home. While this may sound like a great way to use your home for cash, there are many downfalls to this scenario.
First, it is riskier for the lender to loan more than the value of the home. Because of this, there will likely be higher closing costs as well as a higher interest rate. This can cost you more in the long run.
Perhaps the biggest drawback to this is that you now owe more on your house than it is worth. If you sell your house, in all likelihood, you will still owe quite a bit of money after the proceeds of the sale have been applied against your loan balance. In the scenario above, you could be looking at $62,500 remaining after the sale of your home. How would you like to still be paying on that kind of balance for a home that someone else is living in?
|Example: Refinancing 125% of a home's value |
|Home value ||$250,000 |
|Max. LTV % ||125% |
|Max. indebtedness ||$312,500 |
|'- Balance of existing loan ||$150,000 |
|Eligible home equity loan amount ||$162,500 |
|HEL ||$162,500 |
|'+ Owed on 1st loan ||$150,000 |
|Total amount of loans to be repaid ||$312,500 |
|Proceeds from sale of house ||$250,000 |
|Remaining debt on loans ||(62,500) |
The other problem that arises with this is you cannot obtain refinancing when your home sells for the remaining amount. Because this debt is no longer secured by real property, you may have trouble obtaining a loan. If you are able to secure a loan, it will likely be at a higher interest rate than you were paying before. This can also lead to problems qualifying for your next home because you now have an additional substantial payment.
Home equity can be a great resource if you use it wisely. Be smart when you are shopping for a home equity loan and keep your total indebtedness less than the value of your home. When it comes time to sell, you will be glad you did.