How Much Equity Can I Borrow From My House?
Joy Wallet is advertiser-supported: we may earn compensation from the products and offers mentioned in this article. However, any expressed opinions are our own and aren't influenced by compensation. To read our full disclosure, click here.
I realize this is a First World problem, but one frustration of being a homeowner while home prices skyrocket is not being able to painlessly take that added value and put it in your pocket.
Of course, you could sell your home, but you’d still need to find a place to live. A reverse mortgage is another idea, though it may be a better option in retirement.
The best option may be to borrow against your home's equity, meaning you’ll have to pay interest on the loan. Homeowners can take out a home equity loan, home equity line of credit, or do a cash-out refinance of their current mortgage.
If you need the money to pay off high-interest credit cards, remodel your home, or pay for a child’s college costs, among other big expenses, then getting a loan based on your available equity can save you money in the long term when compared to other types of loans.
Jump To
What is home equity?
Equity is the difference between your home’s appraised value and how much you still owe on the mortgage balance. It’s the amount of your home that you own, put into a dollar figure and percentage.
Suppose your home is appraised at $300,000, and you owe $100,000. Your equity is $200,000. The rest of your mortgage, called the mortgage balance, is still owned by the bank.
Put another way, you have 66% equity in your home. But lenders won’t let you borrow all of the equity you have, which in this case is $200,000. They’ll often cap it at 80% or 85% of your available equity, which in this example is $160,000 to $170,000 of your $200,000 in equity.
That 80% to 85% figure is an important number to keep in mind. It’s the maximum amount of equity most lenders let you take out of your home, partly to balance any downturns in the housing market where your home could drop in value. Once you know how much equity you have in your home, you can easily determine the dollar amount you can borrow.
Use Quicken Loans to Check Top Lender Rates
- Powerful home equity solutions
- Get transparent rates from providers
- TrustPilot Rating 4.6 out of 5
- Connect with lenders for $0
- 100% online experience
There’s also the loan-to-value ratio
Another part of determining how much equity you can borrow is the loan-to-value ratio, or LTV, of your home’s current value. It’s another way to show how much equity you have in your home.
The higher percentage of equity you have, the better. This shows you have a larger financial stake in the home and are less likely to miss loan payments. At least 20% equity in your home is generally required for a loan or cash-out refinance, meaning you have an 80% LTV ratio.
The loan-to-value ratio is calculated by taking the amount of your existing or new loan and dividing it by the appraised value of your home. Using the above example, you divide your mortgage balance of $100,000 by the home’s appraised value of $300,000 to get an LTV of 33%.
A 33% LTV means you have 66% equity in your home, which is more than triple the 20% requirement of most lenders. You may already have 20% equity if you started your first mortgage with a 20% down payment.
3 ways to pull home equity from your home
Home equity loan
A home equity loan can be a good way to borrow for large expenses that you already know the dollar amount of. Debt consolidation for high-interest credit cards is one example since home equity loans charge a fixed interest rate of 3.25% to 7.94%, compared to the average credit card interest rate of 17.48%. A lower interest rate on a home equity loan can save you lots of money over the higher interest rates on many credit cards, especially if your credit line is tight because you have a lot of credit card debt.
Home equity loans are meant to borrow a specific amount of money at a fixed interest rate and for a set period of time ranging from one to 30 years. All those factors make it easy to budget for since you’ll have the same payment amount due each month.
It’s a second mortgage on a home and is usually set at a slightly higher rate than a first mortgage. If the home is foreclosed on, the home equity lender is behind the first lender for repayment in the sale of the home.
The risk is the same as it is for the first mortgage: You could lose your home and your equity if you can’t make the monthly payments.
HELOC
A home equity line of credit, or HELOC, is also a second mortgage, but with a revolving balance like a credit card.
HELOCs often have variable interest rates, making budgeting difficult, though there are fixed-rate HELOCs. Interest rates range from 1.99% to 7.24%, depending on your credit score and related factors.
Because it acts as a line of credit, a home equity line of credit is best for expenses you expect to have in the future or regular, large expenses such as paying for your child’s college education. You can borrow the money as you need it.
Home improvements are another area where a HELOC can make sense because the project could go over budget and the credit line against the value of your home provides an option to pay those extra costs. Another benefit is that the interest paid on loans used for home improvements is tax deductible.
If the borrowed money is used for anything other than a substantial home improvement, such as paying off credit cards or student debt, then the mortgage interest is no longer tax deductible.
A home equity line of credit usually has two lending stages over a long period of time, such as 30 years.
The first 10 years or so are a draw period where the line of credit is open, and homeowners only have to make interest-only payments. The loan then changes to a repayment period of around 20 years, where payments on the principal must be made.
Cash-out refinance
A cash-out refinance is when homeowners refinance their current mortgage for more than the amount owed and keep the difference in cash.
Your mortgage payments will likely go up because the mortgage balance increases, but refinancing is a way to borrow some of the available equity in your home.
Home remodels are a common way to use this loan. Remodeling through a short-term construction loan through a cash-out refinance can cause a home to rise in value, which can help repay the construction costs.
Refinancing a first mortgage can be a good way to pay for a home remodel, but it may not work well with ongoing costs because it’s a one-time amount of cash. A HELOC may work better because it’s a line of credit you can pull from as you need it over the years.
Use Quicken Loans to Check Top Lender Rates
- Powerful home equity solutions
- Get transparent rates from providers
- TrustPilot Rating 4.6 out of 5
- Connect with lenders for $0
- 100% online experience
Costs of home equity loans
A lender’s fees for any type of home equity loan can vary. They can be similar to what homeowners pay when getting their first mortgage and can include closing costs, an origination fee to set up the loan, taxes, title insurance, and property insurance.
Home equity loans typically don’t have closing costs, while cash-out refinances do.
HELOCs don’t have finance charges. Only an interest rate that’s usually variable is charged only on the money you use, not the entire amount you can access.
If your taxes and insurance are paid through escrow, you may have to pay them yourself outside of escrow because not all home equity loans or cash-out refinance lenders don’t include those costs in their loans.
Closing costs are often the biggest expense, equaling 3% to 6% of the total loan amount. A $200,000 loan, for example, could cost $6,000 to $12,000.
Appraisal fees cost around $400. If the lender requires a home inspection fee, another $400 is required.
A loan origination fee typically costs $0.5% to 1% of the mortgage amount. For a home with a $200,000 mortgage, that equals $1,000 to $2,000.
All of the loan fees will be presented to you by your lender before you agree to the loan, along with the loan interest rate, loan length, payment terms, including the monthly payment, and the total amount borrowed. Funds will be disbursed to you in one lump sum.
How to increase your home equity
If your loan-to-value ratio isn’t at least 20%, which is the LTV most lenders require, then you can try to increase your home's equity in a few ways. Here are some:
Pay off your mortgage
Paying off your mortgage principal is the most direct way to increase your home equity. It sounds counter-intuitive when you want to use your home’s equity to borrow money, but just getting to the 20% equity threshold may be enough to help you qualify for a loan.
If you can’t afford to pay off the entire mortgage, start making bigger monthly payments. You’ll also save money on interest over the life of the loan, though you should check with your lender if it charges a penalty for paying off your mortgage early.
Wait for home prices to rise
This can be a long-term solution, depending on where you live. Rising real estate prices can increase your home equity since a home’s equity is calculated by taking the current market value of your home and subtracting any loans you have on it.
For example, if your home is valued at $300,000 and you owe $100,000 on the mortgage, then you have $200,000 in equity. But if real estate prices rise and your home is now worth $400,000, and you still owe $100,000, then you now have $300,000 in equity.
Add value to your home
Remodeling your home can also add value to your property, including new landscaping, an additional bedroom or bathroom, or solar panels, among many other home improvements. Some renovations can add more value to a home than others, so research the return if a higher home value is one of your top goals.
Refinance to a shorter loan
Refinancing your mortgage to a shorter-term loan, such as from 30 to 15 years, can help you pay off your mortgage sooner while building equity. The payments will likely be larger, as will the principal being paid off each month, but you’ll build more equity each month with a shorter loan.
Raise your credit score
A better credit score won’t raise your home’s equity, but it can make it easier to qualify for a loan. Poor credit scores can make it difficult to borrow money because such borrowers are seen as a high risk. Pay your bills on time and keep your credit card balances low; your credit score could improve enough to qualify you for a home equity loan.
Use Quicken Loans to Check Top Lender Rates
- Powerful home equity solutions
- Get transparent rates from providers
- TrustPilot Rating 4.6 out of 5
- Connect with lenders for $0
- 100% online experience
Pros and cons
Pros
- Interest rates on home equity loans and home equity lines of credit are often lower than those for credit cards, personal loans, and other types of loans, partly because your home is collateral for the three types of home equity loans.
- Homeowners can usually get these loans with around 20% equity in their homes.
- Loan payments are included in the mortgage, allowing payments to last as long as 30 years.
Cons
- Your home is collateral in these loans, which means lenders could foreclose on it, and you could lose your home if you fall behind on payments.
- If home values fall dramatically, you could be underwater on your loan and owe more than your house is worth. This last happened during the 2008 housing crash.
- Interest rates and mortgage rates are rising, so refinancing a home loan to pull cash out of your home’s equity could give you a higher mortgage rate. You could end up paying more in interest than you did under the original loan.
The bottom line
If you have a large expense, such as a home remodel, a child’s college tuition or even an unexpected, one-time cost, such as a hospital stay, then a home equity loan, home equity line of credit, or cash-out refinance can help. These loans use your home as collateral and can also be any expense, including consolidating credit card debt.
The interest rates are often lower than they are for personal loans and can have a loan term of 30 years. The draw period for HELOCs, which offer a revolving type of credit, is usually 10 years.
You may not need a decade or more to pay off a home remodeling job or other large expenses, but home equity loans can give you that option.
Joy Wallet is an independent publisher and comparison service, not an investment advisor, financial advisor, loan broker, insurance producer, or insurance broker. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice. Joy Wallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. We encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Featured estimates are based on past market performance, and past performance is not a guarantee of future performance.
Our site doesn’t feature every company or financial product available on the market. We are compensated by our partners, which may influence which products we review and write about (and where those products appear on our site), but it in no way affects our recommendations or advice. Our editorials are grounded on independent research. Our partners cannot pay us to guarantee favorable reviews of their products or services.
We value your privacy. We work with trusted partners to provide relevant advertising based on information about your use of Joy Wallet’s and third-party websites and applications. This includes, but is not limited to, sharing information about your web browsing activities with Meta (Facebook) and Google. All of the web browsing information that is shared is anonymized. To learn more, click on our Privacy Policy link.
Images appearing across JoyWallet are courtesy of shutterstock.com.
Writer
Aaron Crowe is a freelance journalist who specializes in personal finance writing and editing. He has worked at newspapers, where he won a Pulitzer Prize, and has written for numerous online publications. These include AOL, US News & World Report, WiseBread, Bankrate, AARP, and many websites focusing on housing, credit and insurance. He lives in California with his wife and daughter.
Share this article
