Not all lenders offer home equity loans or HELOCs. And the ones that do typically limit the amount you can borrow to only a portion of your home’s equity.
Let’s look again at a $300,000 home with a $200,000 mortgage. The owner of this home would have $100,000 in home equity.
Why such a small amount? Because mortgage lenders enforce loan-to-value requirements, which limit the amount of your home’s value that can be tied up in mortgages.
Calculating your maximum home equity loan amount
Loan-to-value (LTV) calculations can be confusing because they apply to both mortgage loans – your existing mortgage as well as the new home equity loan or HELOC.
For example, an 85% loan-to-value maximum on a $300,000 home means the homeowner can hold only $255,000 worth of mortgages ($300,000 x 0.85 = $255,000).
- Home’s appraised value: $300,000
- Mortgage loan balance: $200,000
- Equity in your home: $100,000
- Calculate 85% of your home’s current value: $300,000 x 0.85 = $255,000
- Subtract the $200,000 that you currently owe
- Total equity available to borrow: $55,000
Other factors that affect your borrowing power
Lenders also look at factors like your credit score, credit report, and debt-to-income ratio to determine how large of a loan you qualify for – just like they did when you bought your home.
In addition, the example above assumes you’ll have only two liens – the primary mortgage and the new home equity loan or HELOC. A third lien would limit borrowing power even more.
Because of these limits, you’ll probably https://americashpaydayloan.com/pawn-shops-nd/ need to build up a good amount of equity in your home before you’re able to borrow a large amount of money.
Home equity loan vs. HELOC? What’s better for you?
- A fixed-rate home equity loan
- A variable-rate home equity line of credit (HELOC)
- A cash-out refinance loan
Fixed-rate home equity loan
Simply put, a home equity loan is another mortgage loan that’s usually smaller than your current mortgage. You’d receive the total amount you intend to borrow in one lump sum and pay it back every month.
The repayment schedule for a home equity loan is typically 5-15 years. Since it’s an installment loan, the payment and interest rate remain the same over the lifetime of the loan.
Adjustable-rate home equity line of credit (HELOC)
During the draw period you can use your HELOC like you’d use a credit card, but without the high-interest debt to worry about. Also during the draw period, you can choose to repay loan principal or only make interest payments each month, depending on your financial situation at the time.
The draw period (typically 5 to 10 years) is followed by a repayment period of 10 to 20 years, during which you can no longer withdraw funds and must repay any outstanding balance in full with interest.
The new loan balance is larger than what you currently owe, and the difference is cashed-out to you at closing (minus closing costs).
Since a cash-out refinance is a first mortgage (not a second mortgage), it will typically offer lower interest rates than a HELOC or home equity loan. And requirements can be more lenient, too. FHA cash-out loans are even available with a credit score as low as 600.
On the downside, a cash-out refinance starts your loan over, so it may increase your total interest cost over the life of the loan.
The long-term cost depends on how much time is left on your existing mortgage and how low your new interest rate is compared to your old one.