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How Much Home Equity Can You Qualify to Borrow?

Loan-to-Value Qualification Calculator

This tool estimates how much equity you have built up in your home. This number can be used to help determine if PMI should be removed from a current loan, or for loan qualification purposes on a mortgage refinance or a credit line against your home equity for up to four lender Loan-to-Value (LTV) ratios.

Description Amount
Appraised property value ($):
Total of mortgages owed on property ($):
LTV ratio 1 (%):
LTV ratio 2 (%):
LTV ratio 3 (%):
LTV ratio 4 (%):
Your Current Home Equity:
Your Current Loan to Value Ratio:
% of Appraised Value:
Maximum Debt:
Less Existing Loans:
Your Credit Limit:
Remaining Equity:

 

What is LTV?

Loan to value is the ratio of the amount of the mortgage lien divided by the appraisal value of a property.

If you put 20% down on a $200,000 home that $40,000 payment would mean the home still has $160,000 of debt against it, giving it a LTV of 80%.

LTV is the reciprocal

LTV is based on the total debt to equity ratio for a property, so if one borrows 80% of a home's value on one loan & 10% of a home's value on a second mortgage then the total LTV is 90%.

Lenders typically extend their best rates & terms to borrowers who put down a substantial down-payment. It shows that the home buyer has skin in the game and it gives the lender a margin of safety in case home prices fall & they need to sell the property after foreclosing on it due to the borrower missing payments.

PMI Requirements

The average down-payment on a home in the United States is about 10%.

Borrowers who obtain a conventional mortgage and put less than 20% down are often required to pay for property mortgage insurance (PMI). This is a monthly fee which is in addition to the typical loan payment. The insurance policy protects the lender's interests in the case of default.

The PMI charge is based upon the size of the loan & the size of the down-payment. The cost ranges anywhere from 0.3% to 1.2% of the amount borrowed.

This would mean that if you borrowed $200,000 to buy a home the annual PMI cost might range between $600 and $2,400. That would add $50 to $200 to monthly loan payments & the charge typically lasts until the loan's LTV falls to 78%.

Some borrowers who can't afford to put 20% down on a home might put 10% down and use a 10% piggyback second mortgage in order to avoid PMI charges.

How Much Do You Qualify For?

Homeowners across the United States have much of their wealth tied up in home equity. The 2012-2016 American Community Survey 5-Year Estimate offers the following housing statistics.

Type of Dwelling / Financing Status Unit Quantity Marketshare
total residential units
134,054,899
100.00%
occupied by renter or owner
117,716,237
87.81%
occupied by renter
42,853,169
31.95%
occupied by owner
74,881,068
55.86%
— no mortgage
26,864,528
20.04%
— mortgaged
48,016,540
35.82%
—— no second mortgage, no home equity loan
40,296,854
30.06%
—— second mortgage AND home equity loan
281,865
0.21%
—— second mortgage OR home equity loan
7,437,821
5.55%
——— only home equity loan
5,715,049
4.26%
——— only second mortgage
1,722,772
1.29%

In some cases the stability of homeownership is its own return, but sometimes needs arise which require homeowners to leverage their home equity to pay for major life expenses like home repairs, funding a growing business, investing in a child's education, or covering vital health expenses.

There are a number of different ways to leverage home equity, including:

  • cash out refinancing
  • home equity loans
  • home equity lines of credit

Depending on the credit score of the borrower and the local real estate market lenders will typically allow borrowers to access anywhere from 80% to 90% of their home's equity. Borrowers with great credit scores might be able to borrow up to 95% in some cases.

Comparing Popular Funding Options Leveraging Home Equity

Real Estate Funding Options.

Some of the main criteria in comparisons should be fees and interest rates, tax advantages, monthly payments, terms (years to pay) and intended use of the money.

We will look at four of the more common options for harvesting equity and refinancing – and when each option may make a smart move for you.

This table shows that most share the qualities of traditional financing, but a HELOC offers more flexibility:

Feature Cash out refinance Home equity loan HELOC Personal loan
Adjustable interest rate X X (can be fixed rate)
Fixed interest rate X X X (can be variable)
Interest-only payment option X
Pay on ONLY what you use X
15 or 30-year terms X X X
Good for smaller purchases X X X

Interest rates offered, best to worst, would likely be home equity loan, cash-out refinance, personal loan then the HELOC. Fees are likely to be highest with a cash-out refinance, as are your qualification hurdles.

Deciding between the different types of loans is usually going to be largely dependent on your intended use for the funds. How much you need, and for what purpose can direct you toward one loan over another.

House Made Out of Money.

Cash Out Refi

Cash-out refinancing works like a normal mortgage refinance, except it also includes the homeowner withdrawing additional funds which are added to the loan balance.

When interest rates are low or falling many homeowners have incentive to refinance their home to save on their interest expenses. Refinancing a home can cost thousands of dollars in loan origination and processing fees, but those can easily be paid for by even small reductions in interest rates.

As the Federal Reserve has lifted interest rates over the past couple years the structure of the mortgage market has changed dramatically in a shift away from refinances to home purchases. Nearly 70% of mortgages are now for home purchases, whereas a few years ago refinances dominated the market.

These loans are typically slower to process and come with larger upfront fees than the other options, so they only make sense to use if you are obtaining a better interest rate or need a large sum of money for an extended period of time.

As interest rates rise homeowners save money by leaving their existing low-interest loans in place & tapping equity via other means.

Home Equity Lines of Credit

The HELOC acts more like a credit card, so it has a draw period (5-10 years where you can purchase things) and a repayment period (usually 10 to 20 years). The rate with a HELOC will most often be variable, making it a bit riskier than the other options in this regard. It is also common to overdraw a bit with a HELOC and incur harder-to-handle payments of interest-and-principal.

However, the HELOC can be a smart move when you have a series of smaller costs, perhaps spread out over a short time, and want to handle them fluidly. The ability to pay interest-only, and only on the amount you draw makes this option attractive for many borrowers.

HELOCs and home equity loans are typically approved in a 2 to 4 week period, with the approval process rarely taking more than 6 weeks.

HELOCs are very popular with consumers, and lenders have created a variety of hybrid products that help expand the possibilities for affordable borrowing. Some offer fixed rates or a combination of variable and fixed. As this segment of the market grows you can expect more banks to offer additional lending products to cater to the consumer demand.

In 2017 TransUnion published a study on the return of HELOCs which stated they anticipate there will be approximately 10 million HELOCs originated between 2018 and 2022.

Year HELOC Originations
2012 700,000
2013 800,000
2014 1,000,000
2015 1,100,000
2016 1,200,000
2017 1,400,000
2018 1,600,000
avg/yr 19-22 2,100,000
2019-2022 total 8,400,000

Homeowners use HELOCs for many of the same reasons they refinance first mortgages.

Category Percent Description
Debt Consolidation 30% Consolidate credit card debt & other higher interest forms of credit
Large Expense 29% Paying for a large home renovation or other similar credit need
Refinance 25% Replacing a prior HELOC with a better rate or other advantageous change of terms
Piggyback 9% Used as part of a down-payment on a mortgage origination
Undrawn 7% Line of credit on standby for a rainy day.

Home Equity Loans

Home equity loans, like a cash-out refinance, will use the home as collateral for the loan’s repayment. The main difference between them otherwise, is the addition of the existing mortgage, for a home equity loan does not include coverage of your mortgage refi, as with a cash-out refinance.

Instead, a home equity loan uses some of your earned equity to get you capital, now. It is often called a second mortgage and provides you a lump sum payout, to be used at your discretion. It will usually have an interest rate similar to a cash-out refi. While these loans are not as common or popular as a HELOC, many lenders will offer them.

Personal Loans

Personal loans are typically shorter-term loans, and larger amounts could require some form of securing collateral, though non-collateralized (unsecured) personal loans are common. The interest rate will be a few points higher than a mortgage to cover the lender’s risk, but your improving personal credit score and a lower DTI ratio will help you qualify for better offers.

Personal loans can be smart options when a smaller amount is needed, or the future is less certain than the present. You may pay slightly more in interest rates but will generally complete the loan in far less time, so will pay less overall for what is borrowed.

Note that personal loans may be offered from independent lenders, and not just banks. Be sure to compare rates and fees, as they will vary widely by provider. Numerous online platforms like LendingClub and Prosper also offer these types of loans.

Credit Cards

Credit card debt which rolls over for an extended period of time can be exceptionally expensive. For that reason it is not advisable to carry a large credit card balance, but if you can find a card with a low introductory rate or a zero interest introductory period then it can make sense to leverage that so long as you can pay the card off before the higher rates of interest kick in. Some people are experts in stacking rewards programs which make the cards effectively less than free when the rewards programs are coupled with a low interest rate.

Alternative Finance & Fractional Home Ownership Programs

Some fintech startups offer equity sharing services which allow homeowners to sell a fractional stake in their homes, while other platforms will pay off the home and then lease it back to the homeowner. There are 3 big issues with these sorts off offerings.

  • The United States residential real estate market is heavily subsidized by the federal government through the use of tax breaks and through the use of government sponsored entities (GSEs) in Fannie Mae & Freddie Mac which provide liquidity in the secondary markets and hold down rates. During the Great Recession further subsidies were provided through bailouts and a quantitative easing program which saw the Federal Reserve purchase both treasuries and mortgage-backed securities.
  • After the subprime mortgage led great recession, the traditional home financing market has significant competition, transparency, & many consumer protections baked in via the Dodd-Frank law & the Consumer Protection Finance Bureau.
  • Many fast-growing startups have a risk of flaming out when market conditions turn. Fintech companies like Figure, Point, Unison or EasyKnock may have the best of intentions, but they can't control the economic cycle & are not as systematically important to the economic system as the GSEs or the big banks which were bailed out. Beepi was a fast-growing used car marketplace which raised over a hundred million of dollars, grew quickly, flamed out & was sold for parts.

It is probably advisable to see how the alternative finance companies perform throughout an economic cycle before considering them. Buying a home is something which should add stability to your family life & is not a great area to try something new on such a large purchase, particularly when the core market is so cost effective.

It is also worth noting that in some cases the math behind the deal simply does not work:

The last time I ran numbers on one of these schemes, the parameters provided were to assume 4% appreciation, combined PMI/rate savings from having more down would be 0.5%, $1m home, 5 year ownership horizon, and the equity investor would reap 30% of appreciation. Those were the assumptions the homebuyer gave me. It amounted to paying $65k to "save" $15k. Sounds like a great deal for the equity investor. Here it is. Saving $259/mo times 60 months was $15,540. At 4% appreciation, the $1m home would be worth $1.216m after 5 years. 30% of $216k is $64,800. Turns out there is something worse than PMI. If you stretch it out more than 5 years, or assume more than 4% appreciation, the gap will simply get larger.

Seniors who want to use their home's equity to finance a retirement may want to consider a reverse mortgage, but it probably makes sense to see how the alternative equity providers do through a full economic cycle before considering them as a viable alternative to a vanilla mortgage.

Choosing Wisely

With all forms of financing, it is incumbent on the borrower to understand the details, ramifications and requirements of their loan product. A cash-out refinance should inspire perhaps the most research and comparison, as these loans can be among the most complicated of mortgages.

However, as outlined above, in the right circumstances a cash-out refinancing can offer you the liquidity to accomplish many positive steps forward. You will want to carefully weigh each option against the others to determine which loan product truly makes your best fit – both now, and over time.

You generally want a specific purpose for the funds – or a HELOC might be more applicable, to have the credit line open as need be. Compare, at a minimum, the differences in:

  • Fees
  • Interest rates/APR
  • Terms (duration)
  • Qualification time/processing time
  • Tax implications
  • Monthly payments

By understanding clearly how your home equity options work, you can add it to your arsenal of potential solutions and take advantage of your earned equity & make the best selection for your situation, both now and in the future.