How much money can you borrow with a HELOC?

If you have equity in your home, you might wonder, “How much of a HELOC can I get?” The answer to this question depends on factors we’ll cover below. But first, let’s briefly review what a HELOC, or home equity line of credit, is and how it works.

How do HELOCs work?

A HELOC is a mortgage on a home, separate from your first loan. It works similarly to a credit card, as you get a line of credit. You can spend up to the limit provided and only owe interest on the funds you withdraw.

When you use a HELOC, you borrow money from an institution and can access it via a special card or checkbook. You don't need permission to use the funds as long as they’re within the limits described in your agreement. If you repay what you use, you can use it again during the draw period.

Most HELOCs have a 10 – 15-year draw period. During this time, you must make interest-only payments. After the draw period ends, you cannot access the funds and must repay the principal and interest to satisfy the loan agreement.

How much HELOC money can you get?

Like any mortgage loan, several factors help determine your HELOC loan limits. Your home’s equity, your credit score and your ability to repay the loan are the main components.

Equity in your home

Home equity refers to the difference between what your home is worth and what you still owe on your mortgage.

If a borrower meets the qualification requirements, the HELOC limits can be up to 85% of the home’s value, including your first mortgage.

Home appraisal

Your lender will work with a professional appraiser to determine your home's value. This person will visit your home and take measurements and pictures to determine its size, features and condition. The appraiser then creates an appraisal report they provide to the lender to determine your loan-to-value ratio (LTV) and how much you can borrow.

The home appraisal is a part of your closing costs and may cost $300 to $500. It is a necessary expense as it’s how lenders determine what you can borrow.

HELOC qualification requirements

Lenders must ensure you can afford a HELOC like any other loan. To do this, they have specific requirements, which can vary per lender. Here’s what you can usually expect.

• Good credit: Your credit score tells lenders if you’re financially responsible. You may get a HELOC with a credit score of at least 620, but usually, lenders look for scores of 700 or higher for the best rates, terms and the highest loan amounts.
• Reliable income: A HELOC is a second mortgage on a property, so it takes a second lien position. This puts lenders at risk, so they must ensure you have a reliable income to repay the loan. They often look for a stable 2-year income history.
• Low debt-to-income ratio (DTI): Your DTI tells lenders the percentage of your income committed to existing debts. They prefer to keep DTIs no higher than 43%, but this may vary by lender.
• Positive payment history: Your current payment history helps lenders determine if you’re a good candidate for a HELOC. Timely payments on your first mortgage will help lenders determine if you’re a reasonable risk.

How to calculate your HELOC borrowing power

Your HELOC borrowing power depends on the value of your home and any existing mortgage liens.

HELOC formula

Given you meet the HELOC qualification requirements, use your home’s value and the outstanding balance of your mortgage in the following formula to calculate your borrowing power:

[Total home value] X 0.85 = [Total allowable outstanding debt]

[Total debt allowed] - [Current mortgage outstanding balance] = [HELOC borrowing power]

HELOC Example

It might help to apply this formula to a real-life example, so let’s take a look at the following scenario.

Jordan’s house is worth $450,000. They have a current outstanding balance of $300,000 on their first mortgage and want to use some of their equity for a HELOC.

Here’s how much they can borrow:

$450,000 × .85 = $382,500

$382,500 − $300,000 = $82,500 potential HELOC buying power

Alternatives to a HELOC

HELOCs aren’t the only way to tap into your home’s equity. While Rocket Mortgage^? doesn’t offer HELOCs, we offer alternative financing options worth considering.

Home equity loan

A home equity loan uses your home’s equity, but not as a line of credit like a HELOC. So, while homeowners can tap into equity, you receive the funds as one lump sum.

Using our example above, if Jordan borrowed a home equity loan versus a HELOC, they would receive a check or wire for $82,500 (or more as home equity loans often offer up to 90% of equity), and they could use the funds however they needed, including investing or saving the funds.

Home equity loans and HELOCs have different terms.

• HELOCs: These act as a line of credit you can draw, use, repay and reuse. They have variable interest rates, and you only pay interest on the funds withdrawn.
• Home equity loans: These loans provide the funds once, and you can’t reuse them. You pay principal and interest on the entire loan amount, but the rate is fixed for the life of the loan (10 or 20 years).

Cash-out refinance

A cash-out refinance is another HELOC alternative. However, instead of borrowing a second mortgage, you refinance your first mortgage for a larger loan amount.

You can usually borrow up to 85% of the home’s value. However, unlike HELOCs, you can’t reuse the funds. Instead, you receive the difference between your current mortgage payoff (plus closing costs) and the new loan in a lump sum.

You pay principal and interest on the total amount, but it’s usually a fixed rate, and you only have one mortgage to consider.

FAQs about how much of a HELOC you can get

Here are some other common questions homeowners have.

Is there a maximum amount I’m allowed to borrow with a HELOC?

What is the maximum HELOC amount you can get? It depends on multiple factors. Borrowers can usually get up to 85% of their home’s equity when borrowing a HELOC.

However, from that amount comes your current outstanding mortgage balance. Between all loans, you can have 85% of your home’s value outstanding at once.

How can I tell how much of a HELOC I can get?

Assess your home's value to determine how much of a HELOC you can get. You can use online valuations or talk to a local real estate agent or appraiser. Then, multiply the value by 85% and subtract your existing mortgage loans to determine how much you can borrow.

How can I use my HELOC?

There aren’t any particular ways you must use your HELOC funds. Some borrowers use them to consolidate debt, make home improvements/repairs or pay for large expenses. Some even keep the funds as emergency funds, should they need them.

What are interest rates like on HELOCs?

HELOC rates are higher than rates on first mortgages because they pose a higher risk to lenders. If you default on your monthly payments, the first mortgage lender gets repaid first, and then second lien holders receive whatever is left up to what they’re owed.

The bottom line

Understanding the answer to “How much of a HELOC can I get?” is important, as is knowing your alternatives. Your home equity helps you get the funds needed, and several options for accessing that equity exist.

If you prefer control over your funds and want the ability to draw from the account as needed, a HELOC can be a good option. If not, there are other alternatives, such as a cash-out refinance or home equity loan. If you’re interested in other types of financing, start your application with Rocket Mortgage today.