You'd like to convert some of your home's equity to cash, but you have no idea how much you'll be allowed to borrow. Your maximum home equity line of credit (HELOC) depends on your property value, the balance of any mortgage(s) against your home, and your desirability as a borrower. You can estimate your potential borrowing power with two calculations -- the loan-to-value (LTV) and combined LTV (CLTV) ratios.
Your Home Equity: Let's Do the Math
You'll need to estimate your property value to calculate LTV and CLTV. Realtor.com has a home value estimator, or you can ask a local real estate agent for an estimate. You'll also need to know your current mortgage balance(s). You can contact your mortgage servicer, or find your balance on your free credit report and score from LendingTree (there's no credit card required and no obligation).
Simply divide the mortgage balance by your home's current value to get your LTV. For example, a $150,000 mortgage on a $300,000 residence has a 50 percent LTV, because $150,000 / $300,000 = .5, or 50 percent.
So how much can the homeowner borrow with a home equity loan? Many lenders restrict home equity financing to 80 or 85 percent of the home's value, but some will go to 90 percent if that's their policy, and if the borrower has excellent credit and income.
Maximum HELOC Amount
Suppose that this homeowner wants to borrow $100,000. Is that possible? Here's the calculation:
- Add the $100,000 for the new loan to the $150,000 balance of the existing mortgage. The total is $250,000.
- Divide the $250,000 total by the $300,000 estimated property value.
- The answer is called a combined loan-to-value, or CLTV, because it's the ratio of all mortgages on the property to the property value. In this case, it's $250,000 / $300,000, which is .833, or 83.3 percent.
This homeowner would have to find a lender okay with a CLTV over 80 percent or accept a lower loan amount.
You can also find your maximum loan amount by calculating the desired CLTV first. For example, if the homeowner in the example above was told that she could borrow against 80 percent of her home value, she'd multiple the property value by the maximum CLTV. $300,000 x .80 is $240,000. Subtract the existing mortgage of $150,000 from $240,000 and you get a maximum loan amount of $90,000.
Property Prices Affect Home Equity Line of Credit
A key component in these CLTV calculations is the property value. If you overestimate your home's worth, you may find that you can't borrow as much as you'd expected. But did you know that your home's value can affect your line of credit even after you've been approved and closed on your loan?
Many HELOCs have provisions that allow the lender to reduce or suspend your credit line if home values in your area drop during the term of your loan. That can cause difficulties for you if you're expecting to have available credit for a home improvement project, to make payroll for your small business or pay college tuition. If fluctuating property values are a concern in your area, you might be safer with a home equity loan instead of a line of credit.