How much can you borrow with a HELOC?

Equity can be a valuable resource for homeowners. Taking out a home equity line of credit (HELOC) is one way to access this equity. HELOCs are flexible and often have relatively low interest rates, allowing you to benefit from low borrowing costs.

How much can you borrow with a HELOC? The answer to that question depends on several factors, which we'll discuss below.

What is a HELOC and how does it work?

A home equity line of credit (HELOC) is a revolving line of credit secured by your home. It works similarly to a credit card in that you can borrow against it, repay your balance and borrow again.

But unlike a credit card, you borrow against your home equity, and your credit line doesn't remain open indefinitely. Instead, HELOCs have a draw period during which you can borrow and a repayment period. Borrowing and repayment periods vary, but are often 10 and 20 years, respectively.

Key factors that determine your borrowing limit

Several factors influence how much you can borrow with a HELOC, including:

• Home equity: Your home equity is calculated by subtracting your current mortgage balance from your home's market value. So if your mortgage balance is $145,000 and your home is worth $325,000, you have $180,000 in equity.
• Loan-to-value (LTV) ratio: Lenders also consider your loan-to-value (LTV) ratio, or your outstanding mortgage divided by your home's market value. Many lenders allow a maximum LTV of up to 85%. For example, if your home is worth $325,000 and your mortgage balance is $145,000, the maximum line amount you could qualify for would be 85% of your home’s value ($276,250) minus your existing mortgage ($145,000), which equals $131,250. A lower LTV may help you qualify for better terms.
• Credit score: As with other types of financing, a higher credit score often means a higher borrowing limit and a lower rate. Lenders use your credit score and past payment history to evaluate their risk, and strong credit can translate to less risk.
• Income and debt-to-income ratio (DTI): Your debt-to-income (DTI) ratio is your total monthly debt relative to your monthly gross income. For example, if your income is $6,500 per month and your debt is $1,500, your DTI would be around 23%. A low DTI can translate to less risk and a potentially larger line of credit.
• Employment and financial history: Lenders also evaluate your employment and financial history when you apply for a HELOC. Borrowers with stable employment and consistent income may qualify for larger credit lines or lower rates. Self-employed professionals may need to provide additional financial documentation as part of the application process.

Borrowers with stable employment and consistent income may qualify for larger credit lines or lower rates. Self-employed professionals may need to provide additional financial documentation as part of the application process.

Calculate how much you can borrow with a HELOC

If you're considering a HELOC, it's helpful to get an estimate of how much you can borrow. For an accurate calculation, you'll want to understand your home's current value and your mortgage balance. It's also important to consider other factors like your credit score, debt and income.

Here's an example of what a potential HELOC borrower might qualify for, based on their financials. Let's assume our borrower's home is valued at $350,000, and their current mortgage balance is $150,000, which equates to $200,000 in home equity and an LTV of approximately 43%. Their lender allows an LTV of 85%, or a maximum loan of $297,500, which we get by multiplying 350,000 by 0.85.

However, that maximum loan amount doesn't account for our borrower's current mortgage balance, so we need to calculate their combined loan-to[1] value (CLTV) ratio. Their CLTV ratio will help determine their total HELOC. To calculate CLTV, apply this formula:

(350,000 x 0.85) - 150,000 = $147,500

In this scenario, our borrower could qualify for a HELOC of up to $147,500.

To simplify the calculation process, use a HELOC calculator for a quick estimate before applying.

What can you use your HELOC for?

A HELOC of $147,500 can be used for a variety of purposes. Often, borrowers use their HELOC funds for projects that add value to their home or improve their financial well-being. Here are some common uses:

• Home improvements or renovations (e.g., kitchen remodel, new roof, energy-efficient upgrades)
• Debt consolidation, especially high-interest credit card balances
• Emergency expenses such as unexpected medical bills
• College tuition or education-related costs
• Starting or expanding a small business
• Major life events, such as weddings or family support
• Investments, such as purchasing a rental property or funding a portfolio
• Large purchases, like a vehicle or recreational equipment

Ready to apply for a HELOC?

HELOCs are flexible and offer low-interest financing for borrowers looking to access their equity to cover home renovations or other planned costs. But understanding how much equity you have, and your overall financial profile is key to responsible borrowing. If you have this information and are ready to take the next step, get an estimated HELOC rate today with no impact to your credit score.

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