How Much Can You Borrow with a Home Equity Loan?
Borrowing against the equity in your home is a convenient way to access the funds needed to purchase a new car, pay for your children's education, or even buy a second home. But how much can you really borrow with a home equity loan. While the value of your property is an important factor in determining how much you can borrow with a home equity loan, there are several other criteria that lenders will consider – specifically, your loan-to-value (LTV) ratio and your debt-to-income (DTI) ratio. Below, we'll explore each of these factors in more detail.
The amount of equity built up in your home is calculated by subtracting the principal balance of any existing liens from the value of your property. If, for example, your house is worth $300,000, but you have liens on the property totalling $50,000, the actual amount of equity in your house is $250,000. Most lenders will allow you to borrow up to 80% of this equity, making your maximum lendable value for a home equity loan $200,000.
Your loan-to-value (LTV) ratio is another important factor in determining your lending limit for a home equity loan. This ratio is determined by subtracting the amount of your mortgage loan from the total appraised value of the mortgaged property. In most cases, you'll need to have an LTV ratio of 80 to 85% to qualify for a home equity loan. The exception to this is if you're borrowing against the equity in a rental property. Since these properties carry greater risk for the lender than a primary residence, most lenders will require an LTV ratio of 70 to 75%.
Your debt-to-income (DTI) ratio is a benchmark that lenders use to determine your ability to repay your home equity loan. This ratio is calculated by dividing the total of your monthly debt payments by your gross monthly income. To qualify for a home equity loan, most lenders will require a debt-to-income ratio of no greater than 40 to 45%.
The equity in your home can be a great resource for obtaining the funds you need to handle an emergency or purchase new assets but calculating how much of your equity you can access isn't always a straightforward process. Contact us today for assistance in determining how much you can borrow with a home equity loan.