A home equity line of credit (HELOC) can be a monetary lifeline when you’re faced with home improvements or repairs, or in other situations when you need money. It’s no surprise that so many homeowners wonder, “How much HELOC can I get?”
The amount you can borrow hinges on several factors, including your home’s equity and the lender’s policies, as well as your own creditworthiness. The more you know about the process, the better you’ll be able to maximize your borrowing potential when the time comes.
Before you start calculating the maximum you can borrow on a HELOC, keep reading for a breakdown of the key elements that determine this number and how to calculate it.
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What is a HELOC?
A HELOC is a revolving line of credit that allows homeowners to borrow against the equity they have built up in their homes. Unlike a traditional loan, which provides a lump sum, a HELOC offers flexibility, allowing you to borrow as needed up to a pre-approved limit. This type of loan is secured by your home, meaning your property serves as collateral.
How does a HELOC work?
“HELOC money” refers to the funds you can access through this line of credit. Here are the main terms you need to understand how it works:
- Equity: The difference between the current market value of your home and the amount you still owe on your mortgage. For example, if your home is worth $300,000 and you owe $200,000, you have $100,000 in equity.
This equity serves as the foundation for calculating how much you can borrow through a HELOC. The more equity you have, the greater the amount you can potentially access. Without sufficient equity, you won’t qualify for a HELOC.
- Credit line: A HELOC offers a revolving line of credit based on your home’s equity, allowing you to borrow as much as you need up to the credit limit and repay it over time. Since a HELOC is secured by your home, failure to repay could result in foreclosure, making it a significant financial commitment that requires careful consideration.
- CLTV ratio: The combined loan-to-value (CLTV) ratio is a metric lenders use to assess how much equity you have in your home. It’s calculated by dividing the total amount of all loans secured by the property (such as your mortgage and HELOC) by the appraised value of your home. A lower CLTV ratio often means you're eligible for a higher loan amount since it indicates that you have more equity in the property.
- Accessing funds: You can use the money from a HELOC for various purposes, such as home improvements, debt consolidation, or other financial needs. Interest is charged only on the amount you borrow, not the entire credit limit.
- Repayment: During the draw period (typically five to 10 years), you can borrow and repay funds as needed. Many HELOCs offer interest-only payments during this period, meaning you only pay the interest on the amount borrowed, keeping your monthly payments lower.
Once the draw period ends, you’ll be required to start repaying both the principal and interest, which can lead to a substantial increase in your monthly payments.
Alternatively, some HELOCs require you to make payments on both the principal and interest from the start, which can result in higher initial payments but helps to reduce the principal balance over time.
How much can I get in a HELOC?
The amount you can borrow with a HELOC—often referred to as the maximum HELOC amount—is determined by several factors, including your home’s current market value, the amount you still owe on your mortgage, and the lender’s CLTV ratio. Generally, lenders allow you to borrow up to 80% to 90% of your home’s value, minus all outstanding mortgage balances.
How do I calculate how much HELOC I can get?
It involves a few essential steps. Let’s break it down and see how this calculation works in practice, step by step:
- Determine your home’s market value: Let’s say your home is currently valued at $300,000.
- Apply the lender’s CLTV ratio: Most lenders will offer a CLTV ratio, typically around 80%. Multiply your home’s value by this percentage to see how much total debt (mortgage + HELOC) the lender will allow. In this case: $300,000 x 0.80 = $240,000. This $240,000 is the maximum amount of total loans that can be secured by your home, including your existing mortgage and the potential HELOC.
- Subtract your outstanding mortgage balance: After applying the CLTV ratio, your available borrowing amount is reduced by your outstanding mortgage balance. If you still owe $200,000 on your mortgage:
$240,000 - $200,000 = $40,000. - Result: The maximum HELOC amount you could potentially borrow is $40,000.
Keep in mind that individual lenders may have additional requirements or limitations, so it’s important to consult with them directly to get an accurate estimate. Also, maintaining a good credit score and a low debt-to-income ratio can positively influence the amount you can borrow.
Tips to maximize your HELOC amount
Below you can learn practical tips to help you get the most out of your HELOC:
- Increase your credit score: A higher credit score can lead to better loan terms and higher borrowing limits. Pay down debts, avoid late payments, and correct any errors on your credit report.
- Pay down your existing mortgage: Reducing the balance on your current mortgage increases the equity in your home, which can raise the amount available for a HELOC.
- Increase your home’s value: Making home improvements or renovations that increase your property’s market value can boost your equity, potentially allowing you to borrow more.
- Reduce your debt-to-income ratio: Lenders prefer borrowers with a lower debt-to-income ratio. Paying off existing debts or increasing your income can improve this ratio, making you a more attractive borrower.
- Shop around for lenders: Different lenders may offer varying CLTV ratios and terms. Compare offers from multiple lenders to find the best deal that maximizes your borrowing potential.
- Consider a higher CLTV ratio: If you're comfortable with the risks, a lender offering a higher CLTV ratio (up to 90%) can increase the amount you can borrow. However, higher CLTV ratios come with potential downsides, like higher interest rates and the risk of owning more than your home is worth if property values drop. This can make selling or refinancing your home difficult. Consider these risks carefully before choosing a higher CLTV ratio.
- Maintain steady income: Demonstrating a consistent and reliable income can reassure lenders of your ability to repay the HELOC, potentially increasing your borrowing limit.
- Be mindful of timing: Apply for a HELOC when interest rates are low and your financial situation is strong. This timing can result in better loan terms and a higher credit limit.
Alternatives to a HELOC
If a HELOC doesn’t seem like the right fit for you, consider these alternatives:
Home Equity Loan
- Provides a lump sum of money all at once with a fixed interest rate
- Offers predictable, consistent payments over the loan term
- Ideal for those who need a specific amount for a one-time expense
Cash-out refinancing
- Involves refinancing your existing mortgage for a higher amount than what you currently owe
- The difference between the new loan and your current mortgage balance is given to you as cash
- Useful for accessing a significant portion of your home’s equity at potentially lower interest rates than a HELOC
Personal loans
- Unsecured loans that don’t require using your home as collateral
- Typically have higher interest rates than HELOCs or home equity loans
- Suitable for those with good credit who need a smaller amount of money
Credit cards
- Offer quick access to funds but come with higher interest rates, especially if not paid off promptly
- Best for short-term borrowing or smaller expenses that can be repaid quickly
Maximizing your borrowing potential with a HELOC requires a strategic approach. By focusing on key financial factors like your credit score, home equity, and lender options, you can significantly increase the amount you’re eligible to borrow.