How much can you borrow with a home equity loan?

Whether you want to renovate your kitchen, purchase a vehicle, or consolidate debts, a home equity loan could give you the funds you need.

Home equity loans allow you to borrow against your home’s equity, giving you access to cash that you can spend on whatever you like.

The amount of money you can get from a home equity loan depends on various factors, such as your current home equity, debt-to-income (DTI) ratio, and the lender you choose.

How does a home equity loan work?

A home equity loan lets you borrow a set amount of money from a lender by using your home’s equity as collateral. Your home equity refers to the difference between your home’s current appraised value and any outstanding mortgage on the property. 

After you take out a home equity loan, your lender provides you with the loan proceeds in a lump sum. If your home is worth $300,000, and you still owe $130,000 on your mortgage, you have $170,000 of equity. If you were looking to borrow 85% of your home’s value, you might be able to take out a home equity loan for $125,000:

• 85% of home value: $255,000
• Outstanding mortgage balance: $130,000
• Potential loan amount: $125,000 ($255,000-$130,000)

Because your home is used as collateral to secure the home equity loan, interest rates are typically lower than some other loans. Also, home equity loans usually come with a fixed interest rate, which may make it easier to know how much you owe each month.

Home equity loan vs HELOC: What's the difference?

Home equity lines of credit (HELOCs), like home equity loans, allow you to borrow money using your home’s equity as collateral. 

Unlike home equity loans, HELOCs are revolving lines of credit. That means borrowers can access funds as needed throughout the draw period and only have to pay back what they spend. This may be helpful for longer-term home improvement projects that require funds over time. 

HELOC interest rates are usually variable, so monthly payments may change over time. Home equity loans typically have fixed rates.

Home equity loans and HELOCs can provide the funds you need to finance a home improvement project. However, each option has pros and cons. Compare rates and shop lenders to determine which product is the best fit.

READ MORE: HELOC vs. Home Equity Loan: Which is Right for You?

How to determine home equity loan maximums

While many lenders prefer that you borrow no more than 80% of your home equity, lenders weigh several other factors to determine the amount you may ultimately receive. 

A couple of calculations are central to your home equity loan maximums: 

• Loan-to-value ratio (LTV)  
• Combined loan-to-value ratio (CLTV)

LTV compares your current mortgage amount and your appraised home value. If your appraised home value is $250,000 and you still owe $180,000 on your mortgage, you’d calculate your LTV by dividing $180,000 by $250,000 and converting it to a percentage of 72%. 

CLTV takes the calculation further by factoring in not only your first mortgage, but also any additional secured loans on your home, including a second mortgage like a home equity loan. So, if you take the example above but factor in an additional $30,000 loan, you’d calculate your CLTV by dividing $210,000 by $250,000 and converting it to a percentage of 84%.  

The lower your LTV and CLTV, the better. These percentages may affect your maximum loan amount, interest rate, and overall eligibility.

READ MORE: What is a loan-to-value ratio and how is it calculated?

Other factors that determine how much home equity loan you can get

While your equity, LTV, and CLTV usually determine how much you can borrow on a home equity loan, lenders may also consider your credit score, income, and debt-to-income ratio. Every lender weighs these factors differently, so you should understand them before you apply for a loan.

Credit score

Your credit score is a three-digit figure based on your credit history that lets lenders know how likely you are to repay debts on time. Having a high credit score may make it easier to get a loan.  

Discover® Home Loans requires a credit score of at least 680 for a home equity loan, but requirements vary with other lenders.

Income

When applying for a home equity loan, you might need to show proof of income. Lenders want to ensure you make enough money to repay the loan. 

DTI ratio

You can determine your DTI ratio by dividing your monthly debts by your gross monthly income. Student loans, auto loans, other loan payments, credit cards and court-ordered fixed payments count toward your monthly debt.

DTI limits vary across lenders. However, having a high DTI may affect your ability to get a loan.