How To Get a High-LTV Home Equity Loan or HELOC
Two popular ways to access the equity you’ve built in your home are home equity loans and home equity lines of credit (HELOCs), both of which you can use even if your purchase mortgage isn’t paid off. For most lenders, though, you’ll need at least 15% equity to qualify, meaning you’ll be able to finance 85% of your home’s value. That ratio between your equity and your home’s value is called your loan-to-value (LTV) ratio.
However, if you need more funds, it’s possible to get a high-LTV home equity loan or HELOC that allows you to borrow up to 100% of your home’s value.
Can you get a high-LTV home equity loan?
There are many lenders who offer high-LTV home equity loans. You’ll need to meet your individual lender’s credit and income requirements, however, which could be tougher than standard home equity loan requirements that impose a maximum 85% LTV ratio. You can also expect to pay a higher interest rate.
Whether these additional hurdles and costs are worth it to you depends largely on how you want to use the funds. We’ll cover when it’s a good idea to leverage your home equity in detail below.
Learn more about LTV ratios and why they matter.
Another option: A high-LTV HELOC
For those who want to borrow against their home equity but don’t want a home equity loan, a HELOC provides a similar option with slightly different features.
- Interest rates: Home equity loan interest rates are typically fixed, while HELOC rates are usually variable.
- Interest payments: With a HELOC, as with a credit card, you can draw from the credit line as needed — up to your approved credit limit — and only pay interest on the money you actually use.
- Loan limits: LTV limits are often the same as those for home equity loans: 85%. As with home equity loans, you can find lenders who are willing to issue high-LTV HELOCs for up to 100% of your home’s value.
Not sure which option is best for you? Read our comparison of home equity loans vs. home equity lines of credit.
How does a high-LTV home equity loan work?
If your current LTV ratio is above 85%, or if adding a second mortgage would push your LTV above 85%, you’d be considered a high-LTV borrower. The loan you used to purchase your home is your first mortgage, while a home equity loan or HELOC will be considered your second mortgage.
For example, let’s say the current LTV ratio on your first mortgage is 85% and you’re looking to borrow from your available equity — the additional loan you’re applying for would be considered a high-LTV loan.
Do I need a high-LTV loan?
How to calculate your home equity
Your home equity is the difference between what your home is worth and what you owe on any mortgage loans taken out to pay for it. Since your equity and LTV ratio are crucial to knowing how much financing you may qualify for, it’s essential to understand what these figures truly represent and how to calculate them.
To calculate your home equity, simply subtract the balances of any outstanding loans from your home’s appraised value. The number you get is your ownership stake in the home.
Home equity calculation example
If your home was appraised at $400,000 and your current mortgage balance is $300,000, you have $100,000 in home equity.
How to calculate your LTV ratio
An LTV ratio expresses how much of your home’s value you’re borrowing when you take out a loan. Lenders set a maximum LTV ratio to cap how much you can borrow.
To calculate LTV, you need to:
- Divide your current loan balance by your home’s value.
- Convert that number to a percentage by moving the decimal point two places to the right.
LTV ratio calculation example
For a homeowner with a house worth $400,000 and a $300,000 loan balance, $300,000 ÷ $400,000 = 0.75. So their LTV ratio would be 75%.
How to find your combined LTV ratio
When taking out a second mortgage, like a home equity loan or HELOC, your LTV will include both your original mortgage and the new loan against your equity. This number is called the “combined loan-to-value” (CLTV) ratio.
To calculate CLTV, follow these steps:
- Add your loan balances together.
- Divide that amount by your home’s value.
CLTV calculation example
Following our earlier example, if a homeowner with a $400,000 home and $300,000 first mortgage balance wanted to take out a $20,000 home equity loan, their CLTV would be 80%. Here is the math:
$300,000 + $20,000 = $320,000
$320,000 ÷ $400,000 = 0.8 or 80% LTV
What is a 100% LTV HELOC or home equity loan?
Some specialty lenders, such as Arsenal Credit Union and Signature Federal Credit Union, offer 100% LTV home equity loans and HELOCs. This means you can convert all of the equity you’ve built in your home into cash.
Some 100% LTV HELOC and home equity loans may also come with other unique features or perks. For example, Arsenal offers no-closing-cost loans, while Signature Federal offers closing costs savings of up to $1,000.
Want to see our pick for the best high LTV lender and more? Compare our best home equity lenders today.
What to know about 100% LTV loans with no closing costs
If you’re taking out a second mortgage without paying closing costs, be sure to read the fine print. Here are two big things to look out for:
- Early payoff penalties. You may be on the hook for those closing costs, after all, if you pay off and close the loan too quickly. That could mean within three years, or sometimes even less time. Keep in mind that home equity loan closing costs typically range from 2% to 5% of your loan amount.
- Higher loan costs. A no-closing-cost mortgage can help when you’re short on cash, but lenders typically charge you higher interest rates or increase your loan amount to make up for it. Be sure the money you save in the short term is worth these increased costs over the long haul.
Pros and cons of a high-LTV loan
Advantages
You have both fixed and variable interest rate options. Home equity loans come with fixed rates, which means you’ll have the stability of a fixed monthly payment. On the other hand, HELOCs — which typically come with variable rates — give you more flexibility to use and reuse your credit line.
You can use your loan proceeds for any purpose. The real challenge is in deciding whether it’s worth losing most or all of your available home equity to achieve your intended financial goal.
You’re able to borrow against your house, even as a brand-new homeowner. With lenders willing to provide up to 100% LTV home equity loans, you can access significant financing even if the ink on your closing documents is barely dry.
Learn more about how to get the best home equity loan rates today.Disadvantages
Second mortgage rates are typically higher than first mortgage rates. That’s because second mortgages are riskier for lenders, since they’re second in line when debt has to be repaid in a foreclosure sale. Home equity rates can go even higher if you’re looking for a 100% LTV loan.
Your home is being used as collateral for two mortgages at once. You’re taking out another mortgage on your home when you borrow against your home equity. If you neglect to repay either loan, you’re putting your home at risk of foreclosure.
Home values could drop and put you “underwater” on your first and second mortgages. If this happens, you’d owe more on your home than what it’s worth and lose the equity you’ve built. Having negative equity can also make refinancing or selling your home more complicated.
Read more about what to do if you need to refinance an underwater mortgage.Home equity loan and HELOC eligibility requirements
Your LTV ratio is a key factor in qualifying for a home equity loan or HELOC. Standard guidelines might require a maximum 85% LTV ratio, but if you’re looking to borrow up to a 100% LTV, take the time to shop around. You may find the loan you need — just be prepared to pay higher interest rates.
At a minimum, you’ll likely need a 620 credit score to get a home equity loan. However, each lender is free to set its own requirements, and may set a higher credit minimum for high-LTV loans.
You can qualify with a maximum 43% DTI ratio, but getting your DTI below 36% could put you in a more favorable position. Your debt-to-income (DTI) ratio is the percentage of your gross monthly income used to cover your debt payments.
Lenders will check your assets, employment history and income to determine whether you can repay a second mortgage on top of your first mortgage and other monthly obligations.
Learn more about home equity requirements and what you should know.
Is there a minimum home equity amount I have to borrow?
What if I don’t qualify?
If you aren’t yet eligible to borrow a high-LTV second mortgage, there are a few things you can do to work toward qualifying in the future:
→ Build more equity. The more equity you have, the better your chances are of qualifying for a loan with a high LTV. Your best bet for improving your LTV ratio is to pay down your mortgage balance as quickly as you can. Another option is to dive into some home improvements that will bump up your home’s value.
→ Improve your credit score. Take some concrete steps to boost your credit score. If you’re not sure what factors will help you the most, join LendingTree Spring for free tips and credit score tracking.
→ Lower your DTI ratio. Pay off those credit cards and shrink your auto, personal and student loan balances. Lenders want to see that you can handle extra debt without stretching yourself too thin.
Is it a good idea to borrow against home equity?
How you can best leverage your home equity depends greatly on your financial situation and goals. There are many good reasons a homeowner may choose to borrow from their home equity, including:
- Buying an investment property. You could use some of your equity as a down payment to purchase an investment property, which could be used to host Airbnb guests or rent to long-term tenants, building a passive income stream.
- Consolidating high-interest-rate debt. Getting rid of balances on high-interest credit cards or loans could be a good reason to tap your equity. The interest rate you receive on a home equity loan is likely to be significantly lower than other financial products.
- Covering home improvement projects. If you’ve wanted to upgrade your bathroom or kitchen, a home equity loan or HELOC might make sense. Not only can home improvements potentially boost your home’s value, but they can also provide tax benefits. Generally speaking, IRS rules allow you to deduct the interest paid on mortgages used to “buy, build or substantially improve” a home worth up to $750,000 (this includes second mortgages).
- Paying for higher education. As college tuition costs continue to soar, many families are looking for ways to cover those expenses outside of borrowing student loans.
- Making ends meet during retirement. Retirees often struggle with living on a fixed income. A home equity loan or HELOC can provide extra funds to fill in the gaps.
