How Much Money Can I Borrow with a Home Equity Line of Credit or Home Equity Loan?

If you’ve owned your home for more than a few years, there’s a good chance you’re sitting on substantial equity. The equity you’ve built up in your home can be a useful financial asset that can help you achieve your goals for the life you choose. Home equity is the difference between what your home is worth and what you still owe on your mortgage. With each mortgage payment, you chip away at your principal balance and build equity.

By leveraging your equity, you may be able to secure a home equity line of credit (HELOC) or home equity loan to fund various undertakings. Whether you dream of renovating your home, funding a child’s education, consolidating debt, or using your equity as a down payment on a second property, home equity loans and lines of credit can help harness the full potential of your homeownership. Let’s quickly review what each financing option entails:

A home equity line of credit (HELOC) is a revolving line of credit that also uses your home as collateral. It provides you with access to a predetermined credit limit, which you can borrow from as needed. A HELOC works more like a credit card in that you can borrow and repay repeatedly within the draw period, which usually lasts around 5-10 years.

A home equity loan, also known as a second mortgage, is a lump-sum loan that uses your home as collateral. A home equity loan is typically repaid in fixed monthly installments over a predetermined period, often with a fixed interest rate. Home equity loans are commonly used for large expenses such as home renovations, debt consolidation, or major purchases.

So how much money will you be able to borrow by heading down either path? For the purpose of this exercise, we’ll assume that you have good credit, steady income, a positive payment history, and a low debt-to-income ratio (percentage of your monthly income that goes to monthly obligations). You can read more about the qualifications for a home equity loan or a HELOC by clicking here.

You need to know the current value of your home in order to determine exactly how much equity you have. A lender like Norway Savings Bank would arrange to have your home appraised to supply NSB with an appraisal report that will help determine your loan-to-value (LTV) ratio. The borrowing limit will also depend on the amount of equity you currently have in your home. Typically, in order to qualify for a HELOC or home equity loan, lenders require that you have a minimum of at least 15% to 20% of your home paid off.

Let’s use an example to help show you how these figures are generally reached. Say your home is valued at $500,000 in the current market and you still owe $300,000 on your mortgage.

Current Market Value of Home – Remaining Mortgage Balance = Home Equity
In this scenario, your home equity would be $200,000. Your LTV ratio measures the amount of a loan compared to the appraised value of the property.

Loan Amount ÷ Appraised Value of the Property x 100 = LTV Ratio
So if your home is valued at $500,000 and you owe $300,000 on your mortgage, your LTV ratio would be 60%, which means you have 40% equity in the home.

Now let’s say your lender’s loan-to-value limit is the standard 85% of your home’s value.

Home Value ($500,000) × Lender Limit (0.85)=Estimated Borrowing Limit ($425,000)
But hold on! Don’t forget the $300,000 you owe on your mortgage as that is subtracted from your estimate. So your estimated borrowing limit would be $125,000.

These are general calculations and each situation is different. One constant to apply in any scenario is to always consider borrowing only what you need to keep your payments manageable.

In addition, remember that there is another important distinction between a home equity loan and a HELOC. Home equity loans typically have fixed interest rates which come with predictable monthly payments, but they also have to be paid in full if/when a home is sold. With a HELOC, during the draw period, you pay interest on the amount borrowed. After the draw period ends, you may enter the repayment period, during which you can no longer borrow and must repay both principal and interest. The interest rates on a HELOC may be variable, meaning they can fluctuate over time. Understanding how a home equity loan or HELOC works provides valuable insight into how you could best utilize your home’s equity to help you reach your financial goals.

Norway Savings Bank’s Home Equity Hub features a number of helpful articles that can assist you in your process. The resources explore benefits, differences, requirements, types, and more.

This article was written by NSB residential lending experts, not generated from artificial intelligence.

At Norway Savings Bank, we want to simplify the borrowing process. Our local lending experts meet you where you are, take time to understand your needs, and when we’ve found the right option, we make the application process fast and easy. We’re here to help. Ready to get started? Check out our Home Equity page, or contact a lender.