How Much Can I Borrow on a HELOC?

A home equity line of credit, or HELOC, allows homeowners to borrow money using the equity in their home as collateral. It functions like a revolving line of credit, similar to a credit card, where borrowers can access funds up to a set credit limit and repay the borrowed amount with interest. 

HELOCs are flexible and can be used for many purposes, such as home improvements, debt consolidation, or other expenses. Plus, your HELOC interest may be tax-deductible when used to purchase, construct, or substantially improve your primary residence or second home.

Read on to learn more about how much you can borrow with a HELOC and what it takes to get approved for one. 

Home equity and how much can you get in a HELOC

Home equity is the portion of a home’s value not financed by a loan (e.g., a mortgage). It’s the amount of the home you own free and clear of any financing. A home equity line of credit (HELOC) allows you to take out some of your home’s equity and repay it in the future. 

Most lenders want you to have at least 15% home equity after deducting the amount financed with your mortgage and the HELOC. This means the size of a HELOC you can get is limited to the amount of equity you have in your home. If you don’t have this much equity, a HELOC may not be an option.

A simple formula for calculating your home equity is the value of your home minus the total of all financing against your home. The financing includes any loans that use your house as collateral, including mortgages, HELOCs, and home equity loans. 

Home equity = home’s value – home’s financing

To determine the value of your home, your lender will order a third-party valuation report, such as an appraisal. Home values can change depending on what’s happening in the real estate market and economy. As your home’s value increases, your home equity increases (and vice versa). 

Even if your home’s value doesn’t change, your home equity will increase as the amount you financed against your home is repaid. Once you’ve fully repaid all the loans secured by your home, your home equity will be 100%. At that point, you’ll own the home free and clear of any financing.

“You would rarely want to take out all the equity in your home because if values were to decline and you were in a position that you had to sell your home due to a job loss or job move, you would have to pay off the loan above the home selling price from other sources,” says Rand Millwood, CFP. 

“Typically, you want to leave yourself with a 5% to 10% equity buffer after utilizing your HELOC. If home values continue to increase, you can always either take out a new larger HELOC or ask for an increase of your current one.”

The role of loan-to-value

When lenders evaluate your application for financing against your home, they consider two primary factors: the loan-to-value (LTV) ratio and the combined loan-to-value (CLTV) ratio. These ratios compare the amount of financing you have on your home to your home’s value. 

The LTV ratio is calculated by dividing the loan amount on your first mortgage by your home’s value. The CLTV ratio is calculated the same way, except the numerator includes all financing you have on your home. So, the CLTV formula is all home loans divided by your home’s value.

Many lenders don’t want the CLTV on HELOC to exceed 85%. However, each lender sets its own HELOC underwriting policies, so this limit could vary. You should ask your lender about its HELOC requirements, including its minimum and maximum loan amounts and CLTV limits, early in the application process.

For example, let’s assume your home’s value is $300,000. You have a $240,000 mortgage and a $15,000 HELOC. Your home’s equity, LTV, and CLTV for this example are shown below.

Home value	$300,000
Mortgage balance	$240,000
Home equity line of credit (HELOC)	$15,000
Total home financing	$255,000
Home equity ($)	$45,000
Home equity (%)	15%
Loan-to-value (mortgage only)	80%
Combined loan-to-value	85%

Here are how these different values are calculated in the example:

1. Mortgage balance + HELOC = total home financing, so $240,000 + $15,000 = $255,000
2. Home value – total home financing = home equity, so $300,000 – $255,000 = $45,000
3. Home equity / home value = home equity %, so $45,000 / $300,000 = 0.15, or 15%
4. Mortgage balance / home value = LTV, so $240,000 / $300,000 = 0.80, or 80%
5. Total home financing / home value = CLTV, so $255,000 / $300,000 = 0.85, or 85%

“You typically want to have an LTV of 80%, as this is the usual cutoff to avoid private mortgage insurance to cover the bank in the event of home value decline,” says Millwood. “This is an additional insurance payment added to your monthly mortgage bill and can run into the hundreds of dollars depending on mortgage size and how little equity you have. Additionally, if you were forced to sell during a time of home value decline, you may not get enough from the sell of your home to payoff your entire loan.”

Specific lenders’ HELOC amounts

Lender	HELOC amounts	Maximum CLTV
Figure	$20,000 to $400,000	85%
Bethpage	Up to $500,000 (1)	75% for the best rate*
LendingTree	$10,000 to $2 million	95%
Hitch	$25,000 to $500,000	95%

*Bethpage offers HELOCs above $500,000 on a case-by-case basis. Maximum CLTVs are generally limited to 70 to 85%. 

What other factors affect how much HELOC you can get?

When applying for a HELOC, several factors beyond the amount of equity you have in your home can influence how much you can get. These factors include the strength of your financial condition, as well as the characteristics of your home. 

Remember that each lender has its own underwriting guidelines and policies, so it’s essential to shop around and compare offers from a variety of lenders. Some lenders are more conservative or liberal in their approval criteria. So, if you aren’t approved by one lender, another might approve you.

In general, the following financial considerations often play a significant role in getting a HELOC:

• Credit score: A good credit score is essential to get a larger HELOC or one with a higher CLTV. Lenders use your credit score to assess your creditworthiness and the risk associated with your loan. Besides a larger loan and higher CLTV, a higher credit score often results in a better interest rate.
• Borrower’s income: Your income is a key factor in how much you can borrow. Lenders want to know that you have a stable source of income. You’ll need to provide your lender with income and job history details, including historical tax returns and pay stubs. 
• Debt-to-income (DTI) ratio: Lenders want to ensure you can comfortably repay the HELOC and your existing debts. The DTI is a measure of how easily your debts can be repaid. A lower DTI is generally more favorable, with lenders commonly capping DTIs at 43%.
• Interest rates: If interest rates are high, you might be approved for a smaller HELOC because the monthly payments will be higher (and vice versa). The more cushion you have in your DTI (i.e., the lower it is), the easier it will be to get approved for a HELOC in a rising interest rate environment. 

The purpose of the HELOC can also impact approval. For example, some lenders may be more lenient if you plan to use the funds for home improvements because it can enhance the property’s value.

Additionally, lenders may require different criteria and LTV ratios by property type. For instance, single-family homes are generally viewed more favorably than condos or townhomes. Plus, lenders may set stricter requirements for investment properties or vacation homes than primary residences.

The location of the property can also be a factor. Lenders may be more willing to offer larger HELOCs in areas with strong property values and low foreclosure rates. Conversely, you may be approved for a smaller HELOC in areas with declining property values or higher economic risks.

Considering these factors and improving your financial position is essential to maximizing your chances of getting a larger HELOC with favorable terms. Also, taking time to shop around with multiple lenders and understanding their specific requirements can help you find the best HELOC.

When do you find out how much you can get in a HELOC?

The process varies by lender, but to find out the HELOC size you can get, the first step is often submitting an application. In the application, you’ll specify the size of a HELOC you want. Most lenders will run a soft credit check and decide if you’re pre-qualified based on the loan application. 

If you meet the lender’s basic requirements (e.g., credit score, LTV, DTI), you’ll receive a loan offer. This will include details about the size of the HELOC, repayment terms, rates, and fees. If you choose to proceed, your lender will pull a hard credit check and may request other documents.

For example, you may need to provide tax returns or pay stubs to verify your income. Your lender may also need to order an appraisal to verify the value of your home. In most cases, you’ll need to pay for the appraisal. However, in some cases, your lender may cover these costs.

Once this information is verified, the HELOC will be officially approved, and you’ll be ready to sign the loan documents. If anything changes, the lender may offer revised loan terms, like a lower HELOC amount, if the appraised value is less than the estimate you included in your loan application. 

Alternatives to a HELOC

If you can’t get approved for a HELOC or the loan amount is too small, there are several options to consider. In many cases, you probably weren’t approved because you didn’t have enough equity in your home. So, a home equity loan or cash-out refinance probably aren’t good options. 

In this case, you might consider:

• A personal loan. Most personal loans are unsecured and don’t require collateral. Borrowers with good credit may be able to obtain personal loans for nearly any purpose. These loans typically have higher interest rates than home equity options, so these higher costs are something to keep in mind.
• 401(k) loan. You could also potentially consider borrowing against your retirement account. For instance, you may be able to take a loan against your 401(k). However, before doing this, it’s best to consult an expert about potential tax consequences and their impact on your long-term retirement savings.

Of these alternatives, says Millwood, “The better bet would be to wait until you have paid down more of your mortgage or home values increased.”

If you must choose among them, Millwood says to consider your cashflow.

“If you have sufficient cash flow, a personal loan is likely better because it doesn’t have any impact on your retirement,” says Millwood. “But if cash flow is tight, a loan from your 401(k) may be better as interest rates tend to be lower and the funds are going back into your retirement account.”

FAQ

Can you increase your HELOC amount?

Yes, you can request an increase in your HELOC amount. However, approval is subject to the lender’s discretion and reassessing your creditworthiness and home’s value. Plus, you may need to pay for a new appraisal and documentation fees, so be aware of these potential costs. 

What happens if I have a HELOC and home values in my area change drastically?

If you have a HELOC and home values in your area decline, it can affect the amount of equity available in your home. This can impact your ability to borrow against it or lead to changes in your credit line. Your lender might cap your HELOC at your current balance and not allow additional advances. 

Can I get a HELOC if I already have a second mortgage?

You may not get approved for a HELOC if you already have a second mortgage. When lenders are in a third lien position, the lenders in the first and second lien positions are repaid first if you default on the loan (don’t repay as agreed). These loans are risky, so many lenders won’t make them.