How much can you get with a HELOC?
Please note: Discover Home Loans offers a home equity loan product, but does not offer HELOCs.
A home equity line of credit (HELOC) is a secured line of credit that is backed by your home’s value. A HELOC functions like a credit card – you get access to a revolving line of credit where you can borrow the amount you need, when you need it, up to a certain limit.
If you’re wondering how much money you can borrow with a HELOC, the answer depends on several factors, including how much equity you have in your home, your income, and your credit score. Lenders will also look at your combined loan-to-value (CLTV) ratio to determine how likely you are to make your payments when carrying more than one loan.
Calculate how much you can borrow with a HELOC
Home equity is the difference between how much your home is currently worth and how much you still owe on your mortgage. For instance, if your home is appraised at $350,000, and you have a mortgage balance of $200,000, then you have $150,000 in home equity ($350,000 − $200,000 = $150,000).
When calculating how much you can borrow with your line of credit, your lender will use your CLTV to determine if you have sufficient equity. This is calculated by taking your existing mortgage balance plus your desired loan amount and dividing it by your home value.
CLTV = (New Loan Amount + Mortgage Balance) ÷ Home’s Market Value
Let’s say, using the examples above, that you want to take out $50,000 from your home equity to remodel your kitchen:
$50,000 (new loan amount) + $200,000 (mortgage balance) ÷ $350,000 (home value) = 71% CLTV
Typically, you will need to have a CLTV ratio below 80% to borrow from your home equity, but some lenders may let you borrow up to 90% of your home’s value. You can use a tool like this loan amount calculator to get an idea of how much money you might be able to access from your home equity with financing.
What are HELOC loan limits?
HELOC loan limits refer to the maximum amount of money that a lender is willing to extend as a line of credit against the equity in your home. Several factors come into play when determining the loan limits for a HELOC. Some of these include:
- Home Equity: The primary factor affecting loan limits is the amount of equity you have in your property. Generally, lenders will allow a borrower to access a percentage of their home’s appraised value (calculated as the CLTV ratio).
- Credit score: Lenders consider your credit score as an indicator of your creditworthiness and ability to repay the loan. A higher credit score may lead to a higher loan limit, as it signals to a lender that a borrower has responsibly managed their credit in the past.
- Income: Lenders may also assess your income and debt-to-income (DTI) ratio to determine your ability to make monthly payments on a HELOC. A higher income and lower DTI ratio may increase the loan limits.
- Lender Policy: Each lender has its own policies and guidelines regarding HELOC loan limits. It’s crucial to research and compare multiple lenders to find the one that aligns with your financial goals.
How can you increase your HELOC limit?
If you’re looking for ways to increase how much you can borrow with a HELOC, there are a few strategies you can use.
- Increase your home equity: You can increase the equity in your home by making improvements that increase your home’s value or by paying down the mortgage debt you owe. Remodeling your kitchen or bathroom or replacing your old roof may boost the value of your home and increase the amount of equity in your home while doing so. If you pay off part of your mortgage debt, you also increase your home’s available equity. While paying your monthly mortgage bill will shrink your debt, consider paying more than your monthly payment to reduce your principal faster while increasing your available equity. With more equity, lenders will be comfortable offering you more to borrow through your HELOC.
- Improve your credit score: Healthy credit scores allow lenders to increase the amount you can borrow through a HELOC. A higher credit score can help you secure a better HELOC interest rate and more favorable terms. Lenders use your credit score and other factors of your credit history to determine how likely you are to repay your loan. If you focus on improving your credit score, you may be able to translate that into a higher HELOC loan limit.
- Reduce your debt: HELOC lenders often take your DTI ratio into account when deciding if they want to lend you money. Your DTI ratio compares what you earn (income) to what you owe (debt) and gives lenders an idea of how much you can realistically borrow and pay back. To increase what you can get from a HELOC, lower your DTI, and larger borrowing limits may be available to you. When calculating how much debt you have, lenders usually consider your current mortgage payments, car loans, credit card debt, student loan payments, and any other existing monthly debt you are carrying. Paying off revolving debt or paying down installment loans can decrease your overall debt, improve your DTI, and encourage lenders to offer you more money with a HELOC. Increasing your income is another way to improve your DTI — a higher income may allow lenders to offer higher limits of borrowing to match your ability to repay the loan.
Borrowing alternatives to HELOCs
When you’re looking for options to finance home improvements, consolidate debt, or pay other large expenses, there are some alternatives HELOCs. These include home equity loans, cash out refinances, personal loans, and credit cards:
- Home equity loan: A home equity loan is a loan that comes in a lump-sum payment with a fixed interest rate, fixed terms, and fixed monthly payments (unlike the variable rates and potentially fluctuating monthly payments of a HELOC).
- Cash out refinance: With a cash out refinance, you can refinance your current mortgage into a larger mortgage and then take out the difference in cash. For instance, if your home is worth $350,000 and you owe $200,000, you have $150,000 in equity. If you need $50,000 for a home improvement project, you may be able to add this amount to the principal of your newly financed mortgage loan for a total of $250,000.
- Personal loan: Unlike options that let you tap into your home equity, personal loans are considered unsecured loans because they are not backed by any collateral. These can typically give you access to funds faster than HELOCs, home equity loans, cash out refinances. However, because they are not secured by collateral, they will often come with higher interest rates and lower loan limits than other alternatives.
- Credit card: Like with a HELOC, a credit card gives you the option to access only what you need rather than receiving funds from a loan in a lump sum. Some credit cards may offer a zero percent annual percentage rate (APR) introductory period when you open a new one. But once that period ends, they will typically have higher overall costs than secured borrowing options including higher interest rates and potential annual fees.
Find your best home equity lending option
If you’ve built up enough equity in your home, it may be a great source of cash to fund a home renovation, buy a second property, or even pay for your child’s tuition. There are three main lending options that can be used to tap into the equity of your home: HELOC, home equity loan, and cash out refinance. Each option comes with pros and cons.
On the surface, the HELOC and home equity loan seem very similar – both are loans that allow you to use your home as collateral to obtain cash. Both come with interest rates that are typically more favorable than using your credit cards or taking out a personal loan. A HELOC and a home equity loan differ in how they are structured.
A HELOC functions like a credit card. You borrow as much or as little as you need on a revolving basis up to a certain credit limit. A HELOC comes with a variable interest rate which can fluctuate, causing your payments to differ month to month. This can make budgeting a little more challenging as you can’t predict the exact amount of your monthly payments.