A home equity loan helps you unlock the value you’ve accumulated in your home and turn it into cash — for renovating a kitchen, covering unexpected expenses, or paying college tuition.
But exactly how much can you borrow with a home equity loan? The answer depends on your home’s value, loan-to-value ratio, and combined loan-to-value ratio. We’ll break down what these terms mean and how to calculate each one so you have a clearer picture of your borrowing potential.
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A home equity loan is a type of second mortgage. With a home equity loan, you borrow against the equity you’ve built up in your home without resorting to a cash-out refinance, which replaces your entire first mortgage with a new one. Instead, you’ll have two home loans and two monthly mortgage payments.
Once approved, you’ll receive a lump-sum payment that you’ll pay back to your lender in fixed monthly payments over a predetermined period. Since home equity loans have fixed interest rates, your rate will stay the same throughout the entire term, which typically lasts between five and 30 years. That said, there’s a limit to how much you can borrow.
Learn more: What is a home equity loan? A complete overview
Your home’s value, loan-to-value ratio (LTV ratio), and combined loan-to-value ratio (CLTV ratio) are the major factors affecting how much you can borrow.
Since the value of your home can fluctuate based on market conditions, most lenders will require an appraisal to assess its current market value. Once you know how much your house is worth, you can calculate your LTV and CLTV ratios.
A key factor lenders consider when evaluating your application is your loan-to-value ratio. Simply put, LTV compares your mortgage balance to your home's current market value and is expressed as a percentage.
For example, if you make a 5% down payment when buying the house, you have 5% equity in the home on day one, and your LTV ratio is 95%. As you pay down your mortgage principal, your equity increases, and your LTV ratio decreases.
You can use this formula to calculate your loan-to-value ratio:
LTV = (primary mortgage amount / home value) × 100
If your home is worth $500,000 and you owe $325,000 on your mortgage, your LTV ratio is $325,000 / $500,000 x 100, which is 65%. This means you still owe 65% of your home’s value and have 35% equity in your house.
Keep learning: Understanding LTV and how it impacts your mortgage
Now that we’ve established how your LTV ratio works, we can move on to your CLTV ratio — the number your mortgage lender uses when deciding whether to approve you for a home equity loan and how much to lend you.
The LTV ratio only focuses on your primary mortgage balance. When you apply for a second mortgage, such as a home equity loan or home equity line of credit, lenders will also consider your combined LTV. With a home equity loan, the lender will look at the amount you want to borrow, combine it with the LTV ratio on your existing mortgage, and use your CLTV ratio to decide whether you qualify and how much to loan you.
Use this formula to calculate your combined loan-to-value ratio:
CLTV = (combined loan balance / home value) x 100
Referring back to the same example mentioned earlier, let’s say your primary mortgage balance is $325,000 and your home value is $500,000. If you want to take out a $50,000 home equity loan, your CTLV will be 75%. This is calculated by dividing the total loan amount ($325,000 + $50,000 = $375,000) by the home value ($500,000) and converting it to a percentage.
($375,000 / $500,000) x 100 = 75%
Many lenders allow you to take out a home equity loan with a CLTV as high as 85%. If your CLTV ratio is higher than 85%, consider shopping for lenders that approve higher ratios or applying for a smaller home equity loan balance.
Dig deeper: What is a CLTV ratio, and why should homeowners care?
Now that you know how LTV and CLTV ratios work, let’s break it down further with another example.
Let’s say you already have a primary mortgage balance of $240,000, and your current home value is $320,000. In this scenario, your LTV is 75%.
($240,000 / $320,000) x 100 = 75% LTV ratio
If your lender allows a maximum CLTV of 85%, your combined loans (primary mortgage + home equity loan) cannot exceed $272,000 (85% of $320,000).
In other words, you may be approved to borrow $32,000 with a home equity loan — or 10% of your property’s value.
If you need more help understanding how a home equity loan would impact your financial situation, feel free to speak with a loan officer or mortgage professional.
Read more: What do you need to qualify for a home equity loan? Here are the requirements.
Mortgage lenders will also scrutinize the following factors to assess your ability to repay the loan:
Credit score. Most lenders will require a credit score of at least 680 to be eligible for a home equity loan, though this requirement varies by lender.
Income. Lenders will also want you to provide proof of income to show you’re financially capable of repaying both your original mortgage and a home equity loan.
Debt-to-income ratio (DTI). Your DTI ratio is calculated by dividing your total monthly debt payments by your gross (pretax) monthly income. This ratio helps lenders gauge how much of your income is already tied up in debt and whether you can manage additional loan payments without financial strain.
Home equity. Home equity is the difference between your home value and the amount you owe on your mortgage. To calculate your home equity percentage, divide your equity by your home’s value and multiply the result by 100. For example, if your home is worth $500,000 and you still owe $280,000 on your mortgage, you have $220,000, or 44%, in home equity. Lenders typically require at least 15% to 20% equity for you to be eligible for a home equity loan.
Learn more: Debt-to-income ratio — Why it matters and how to calculate it
The minimum home equity loan you can borrow depends on the lender. For example, Rocket Mortgage home equity loans require you to borrow at least $45,000, while Navy Federal Credit Union lets you take out as little as $10,000.
If you need less money, consider other options, such as personal loans, which may allow you to borrow $100 or less. Just make sure you research any fees that come with the personal loan.
Read more: Home equity loan vs. personal loan — Which is best for home improvement?
The most significant risk of taking out a home equity loan is potentially losing your home if you fail to make loan payments. Since your property secures the home equity loan, your lender has the right to foreclose on your home if you fall behind on monthly payments.
Yes, a home equity loan is a second mortgage since it’s a loan made in addition to the primary mortgage you used to purchase the home. A home equity line of credit (HELOC) is another popular type of second mortgage.
Your monthly payment on a $100,000 home equity loan depends on your loan term and interest rate. Assuming a 30-year loan term and an 8.5% interest rate, you can expect to pay $769 monthly toward your home equity loan.
This article was edited by Laura Grace Tarpley.
