How much can I borrow with a home equity loan? Home equity loans do not allow you to borrow against all of the equity you’ve accumulated, but they can still be a fantastic source of large credit compared to other options.
This guide has been created to explain the fundamentals of a home equity loan and home equity line of credit (HELOC) – and to uncover how much equity you can access using them. Read on for the details and speak with professionals for personalised money advice.
What is home equity?
Home equity is a financial sum of your home that you own outright. It is worked out by subtracting your outstanding mortgage balance away from the value of your home. Do not confuse this with the value of your home when you bought it. The calculation must include an updated value to determine the equity in your home accurately.
For example, if you bought a home for £250,000 with an outstanding balance on your mortgage of £150,000, you will have £100,000 equity if the value of your home has remained the same. If your home’s value has increased by £20,000 then you’ll have £120,000 equity. However, if your home has decreased in value the equity will go down as well.
Can you borrow money from your home equity?
You can borrow money against the equity in your home. You can do this in several ways, such as over-borrowing through a new second mortgage or by using a home equity loan or HELOC (we explain the latter towards the end of this guide). All of these are a type of secured loan which put your home at risk.
A home equity loan will let you borrow a lump sum based on your equity, which you then pay back (plus fixed interest) within immediate and ongoing monthly payments over a fixed term. Thus, to qualify for a home equity loan you must have some home equity available. You can get a home equity loan from banks and online lenders.
How does a home equity loan work?
A home equity loan works by allowing you to borrow against the equity in your home, but the loan is secured by your equity. This means if you do not keep up with monthly payments and repay the loan balance in full as agreed, the lender can force you to sell your home to take back their money. If you choose to take out a home equity loan, you must be prepared to put the property on the line.
By securing the loan against your home equity, the lender has greater assurances that they’ll get their money back. For this reason, they usually offer lower interest rates compared to personal loans and credit cards. You may be able to save money by using a home equity loan compared to other credit options – but not always!
These loans require an assessment of your ability to make payments and repay in full, and the lender will check your credit score.
Can I borrow 100% of the equity in my home?
You are highly unlikely to be able to borrow 100% of the available equity as this can be dangerous for the lender and the borrower.
If they allowed you to access credit with a 100% loan to value ratio and the property decreased in value, they might not be able to recover all of the money if you have failed to repay. Moreover, the homeowner would have borrowed more than the home is worth, creating easily avoidable debt.
How much can I borrow with a home equity loan?
Most lenders allow you to borrow up to a maximum of 80-85 percent of the amount of equity you have. For example, if you have £100,000 home equity you might be able to borrow around £80,000 to £85,000 tops. This will depend on the lender and your personal circumstances; you might only be able to access a smaller percentage of your equity.
Minimum home equity loan amount
As well as a maximum amount you can borrow, most lenders have a minimum amount you can access through these loans. As standard, lenders offer these loans with a minimum value of around £10,000. This means you’ll need more than £10,000 in equity considering you will only be able to borrow against 80-85% of it.
If you need less than £10,000 credit then you might be forced to search for other options, such as an unsecured loan or credit card.
Is there an appraisal with a home equity loan?
So that the lender can accurately work out your home equity – and how much they will lend you – they will need to revalue your property. This is called an appraised value and is usually conducted by an estate agent on the lender’s behalf. When an appraised value is needed, you may have to pay a fee or the lender may cover this cost itself.
What is the current interest rate on a home equity loan?
A home equity loan is an appealing credit source because of its typical low-interest rates. You can find some of these loans with interest as low as 2%, while others can be as much as 10%. What you can get will be determined by your income, credit score, the value of your property, mortgage balance and how long you want to pay back the debt.
Are home equity loans a good idea?
A home equity loan can be a good idea for some people. If you need a large amount of credit that cannot be gotten through a conventional unsecured loan then a home equity loan is one of the best solutions available. Or you may just want to avoid the higher interest on other credit options. But if you have an excellent credit score you may be able to get a competitive loan without having to risk your home as collateral.
And you should also be aware of closing fees that can wipe any savings you make through a lower interest rate…
What is the downside of a home equity loan?
The major downside of a home equity loan – aside from putting your property at risk – is that you might have to pay a closing fee at the end of the loan term. The average closing fee is between 2% and 5% of the total borrowed. For example, if your loan was worth £20,000 you could have to pay an additional £400 to £1,000. And if you borrowed £100,000 you could have to pay as much as £5,000 more.
Can you get an equity loan with bad credit?
You will find it more difficult to get an equity loan if you have a poor credit score. You might still be able to get one, but you are likely to be offered a higher rate of interest despite risking your home. You’re also likely to be offered a higher interest rate if you apply for credit cards, personal loans etc.
Home equity loans vs home equity line of credit (HELOC)
An equity loan is similar to a home equity line of credit with some key differences. Whereas the loan pays out all at once, a HELOC provides a line of credit that can be accessed over a draw period, which can last years. The homeowner taps into the line of credit when they need a bit like how someone would use a credit card.
Home equity lines of credit only start being repaid through a monthly payment once the draw period ends sometime in the future, and for this reason among others, they have a variable interest rate instead of a fixed interest rate.
How much can you borrow using HELOCs?
Using equity loans and HELOCs allows you to borrow the same amount. Lenders use the same logic and responsible lending when offering either. You’ll again only be allowed to borrow up to a maximum of around 80-85% of your equity available.
How do I grow my home’s equity?
Many people want to know how they can grow their home’s equity because it improves their financial standing and could enable them to access a bigger home equity loan. There are two ways of doing this, namely:
- Continuing to make mortgage payments or overpaying on your mortgage
- Increasing the value of your property
To increase your home’s value, you could update rooms and renovate spaces. Or you might even want to consider a loft conversion, conservatory or an extension into a back garden. Some factors can increase and decrease your home’s value – and therefore how much equity you have – which are out of your control.
Discover more home equity loan information!
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