How much can I borrow with a home equity line of credit?
Monday, 21 September 2020
If you need cash and you're a homeowner, you may be able to access cash from your home.
A home equity line of credit (HELOC) allows you to tap into some of the equity you have in your home and turn it into cash.
A HELOC is a loan that is secured by the value of your home. But if you're going to tap into your home for cash, you need to ﬁrst know how much you can get. For instance, can a home equity line of credit provide enough money to complete that renovation you have in mind—or just enough to get started? Can it provide enough to pay for your child's college tuition, or their wedding?
The answer is that it depends. The amount of money you can borrow with a HELOC depends on the amount of equity you have in your home.
How do I ﬁgure out how much equity I have?
Equity is the portion of the home's value that you own outright, that is, the portion of the value you have paid for or paid oﬀ. You can estimate your home's equity by subtracting the amount you owe on your home (your mortgage principal balance) from the current market value of the home.
To determine the current market value, your lender may hire a professional appraiser. The appraised value may be higher than the price you paid for your home if you've made improvements to the home or if real estate prices have increased in your local area. You may be able to estimate the value with online tools such as Zillow, but a professional appraisal report could be required to establish the actual current value.
When you know the current value of your home, you just have to subtract your mortgage principal balance to ﬁnd the amount of equity you have. For example, if your home is worth $200,000 and you owe $100,000 on your mortgage, you have $100,000 in equity in your home.
How much can I borrow against my equity?
The amount you can borrow is usually based on a percentage of your available equity. For instance, your lender may take a percentage of your home's appraised value (usually about 80%) and subtract the outstanding amount you still owe on the mortgage.
For example, let's say your home is valued at $200,000 and you owe $100,000, which means you have $100,000 in equity.
Typically banks will only allow you to borrow up to 80 percent of the value of your home. So, 80 percent of $200,000 is $160,000. This is the maximum amount of loans you can have, both mortgage and equity line or loan.
Remember, the most you can borrow is $160,000. You owe $100,000 on your mortgage, which leaves $60,000 in equity, which you could potentially borrow.
A HELOC is not like a regular loan, in which the lender just gives you the full lump sum. Like a credit card, a HELOC gives you a line of credit, except with a limited advance period. However, unlike a credit card, a HELOC's interest rate may be signiﬁcantly lower because the loan is secured by your home, which is used as collateral. During the draw period, a borrower can access what they need incrementally, often making monthly interest only payments on the amount drawn. When the draw period ends most lenders require, the borrower to begin making payments that include both interest and principal.
In addition to considering the amount of available equity in your home, your lender may also consider things like your credit history, the amount of all debts you currently have, and your income when determining exactly how much you qualify to borrow. Because of the way the HELOC is structured you only take out what you need when you need it rather than taking all the money at once.
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