Many homeowners are flush with equity, and tapping it can be tempting. Some lenders will let you borrow as much as 100% of your home equity — the home’s current value minus the mortgage balance — for any purpose. Your house, though, will be on the line.
Here are things to know before applying for a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance.
What’s the Most You Can Borrow With a Home Equity Loan?
To determine how much you can borrow with a home equity loan, lenders will calculate the combined loan-to-value ratio: your mortgage balance plus the amount you’d like to borrow compared with the appraised value of your home.
Most lenders will require your combined loan-to-value ratio (CLTV) to be 90% or less for a home equity loan or HELOC (although some will allow you to borrow 100% of your home’s value).
combined loan balance ÷ appraised home value = CLTV
Let’s say you have a mortgage balance of $150,000 and you want to borrow $50,000 of home equity. Your combined loan balance would be $200,000. Your home appraises for $300,000. (An appraiser from the lending institution determines your property value.) The math would look like this:
$200,000 ÷ $300,000 = 0.666
Your CLTV is 67%.
If a lender allowed you to borrow 90% of CLTV in this scenario, you would have a loan of $120,000:
($150,000 + $120,000) ÷ $300,000 = 0.900
But just because you might qualify for a loan or line of credit of this amount doesn’t mean it’s a good idea for your personal situation. Consider what the payments, which include interest, would look like and whether your financial situation is secure enough for you to afford them if you suffer a setback.
Three Ways to Tap Home Equity
You paid off a chunk of your mortgage or all of it, or your home value soared along with the market, but now a wedding, college, remodel, or something else has you wanting to put that home equity to use. Here are three ways to do that.
Remember that converting home equity to cash means you’ll be using your home as collateral.
Home Equity Loan
Home equity loans come in a lump sum. They are often useful for big one-time expenses like a new car or swimming pool and for borrowers who know how much they need and who want fixed payments.
Some lenders waive or reduce closing costs of 2% to 5%, but if you pay off and close the loan within a certain period of time — often three years — you may have to repay some of those costs.
HELOC
A HELOC may be helpful for long-term needs such as home renovations, college tuition, or medical bills.
Borrowers who want flexibility when dealing with, say, a home addition may favor a revolving line of credit over a lump-sum loan.
Again, some lenders waive the closing costs for a HELOC if you keep it open for a predetermined period.
Recommended: How Do Home Equity Lines of Credit Work?
Turn your home equity into cash with a HELOC from SoFi.
Access up to 90% or $500k of your home’s equity to finance almost anything.
Cash-Out Refinance
A cash-out refinance might be a good choice if you want to borrow more than you’d qualify for with a home equity loan or HELOC. A cash-out refi replaces your existing mortgage with a new mortgage for more than the previous balance. You receive the difference in cash.
Homeowners will often need to have 20% equity left in the home after refinancing. Some lenders will let them dip below that minimum but pay for private mortgage insurance on the new loan.
Some HELOC borrowers refinance before the draw period ends. In that case, the cash can be used to pay off the HELOC.
You can change the mortgage term and aim for a reduced interest rate with a cash-out refi. Closing costs will be required; it’s a new loan.
Recommended: Cash-Out Refinance vs HELOC
What’s the Difference Between a Home Equity Loan and a HELOC?
A home equity loan, also known as a second mortgage, comes in a lump sum with a repayment term of 10 to 30 years. It typically has a fixed interest rate.
A HELOC is a revolving line of credit that lets a homeowner borrow money as needed, up to the approved credit limit. The credit line has two periods:
• The draw period, when you can use the line of credit. It’s often 10 years. Minimum monthly payments usually will be interest only on the amount withdrawn.
• The repayment period, often 20 years, when principal and interest payments are due.
Most HELOCs have a variable interest rate but cap how much the rate can rise at one time and over the loan term. (Some lenders, though, offer fixed-rate HELOCs or allow the borrower to fix the rate on a balance partway through the loan.)
Some HELOCs require you to draw a minimum amount upfront. Some have a balloon payment at the end of the draw period, when the loan principal and interest are due. Ensure that you understand your HELOC’s terms, and when the draw period ends and the credit line is closed.
How Is a HELOC Calculated?
Qualified borrowers are often able to access as much as 90% of their equity with a HELOC.
Some HELOC lenders require that the homeowner retain at least 20% equity in the home, but a few are more generous.
Is Taking Out Home Equity Right for You?
If you’re aware of the risk, you’ve read all the fine print, and you forecast no job or income loss, tapping home equity can be extremely useful.
HELOCs usually have lower interest rates than home equity loans, but some people prefer the fixed rate and payments of the latter. HELOC rates tend to be a tad higher than mortgage rates, but you only have to pay interest on what you borrow during the draw period.
Most cash-out refinances result in a new 30-year fixed-rate mortgage.
Approval for a home equity product and the rate you’re offered will depend on your credit score, debt-to-income ratio, home equity, and home value.
Shopping around can yield the best offer.
Recommended: Home Improvement Cost Calculator
The Takeaway
How much equity can you borrow from your home? Homeowners who meet credit and income requirements are often able to tap up to 90% of equity and sometimes more with a home equity loan or HELOC. A cash-out refi is another way to make use of home equity.
SoFi now offers flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively low rates. And the application process is quick and convenient.
FAQ
How can I increase my home equity?
Paying off your mortgage faster, refinancing to a shorter loan term, and making home improvements are some of the ways to boost home equity. In a competitive market, your home value may just naturally rise.
How quickly can I get cash from my home equity?
It depends on the product, but closing can take place in as little as two to four weeks.
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All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.
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*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
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