Home equity refers to how much of the house is actually yours, or how much you’ve “paid off.” Every time you make a mortgage payment, or every time the value of your home rises, your equity increases. If you build enough equity, you may be able to borrow against it for other financial needs. Use this calculator to see if you’re likely to qualify for a home equity loan and how much money you might be able to borrow.
How we got here
How does a home equity loan work?
A home equity loan uses your house as collateral. When considering your application for a home equity loan or home equity line of credit (HELOC), lenders need to make sure the home equity actually exists and that you have an appropriate loan-to-value ratio, or LTV. When your LTV is high, it means your equity is low, and lenders will be reluctant to let you borrow against it.
How to calculate home equity
To determine how much you may be able to borrow with a home equity loan or HELOC, divide your mortgage’s outstanding balance by the current home value. This is your LTV. Depending on your financial history, lenders generally want to see an LTV of 80% or less, which means your home equity is 20% or more. In most cases, you can borrow up to 80% of your home’s value in total. So you may need more than 20% equity to take advantage of a home equity loan or HELOC.
An example: Let’s say your home is worth $200,000 and you still owe $100,000. If you divide 100,000 by 200,000 you get 0.50, which means you have a 50% loan-to-value ratio, and 50% equity. Lenders that allow a combined loan-to-value ratio of 80% may let you borrow another $60,000. That would bring the amount you owe to $160,000, which is 80% of the $200,000 home value.
How to use the home equity loan calculator
- Enter your home’s value (if you’re not sure, check your most recent appraisal or look up your address online).
- Enter the amount remaining on the loan (find this on your most recent mortgage statement).
- Choose the range that reflects your current credit score (if you haven’t checked your credit score in a while, NerdWallet will provide it for free).
The tool will immediately calculate your current loan-to-value ratio. If you own at least 20% of your home (an LTV of 80% or less), you’ll probably qualify for a home equity loan, depending on your financial track record.
The calculator will also show the dollar amount you’ll likely be able to borrow so you can determine whether a home equity loan meets your financial needs.
Home Equity Loan 101
What are the requirements for a home equity loan?
Both a home equity loan and a HELOC are ways to cash in on your home’s equity, but they work differently.
A home equity loan gives you all the money at once with a fixed interest rate. HELOCs act more like credit cards; you can borrow what you need as you need it, up to a certain limit. HELOCs have adjustable or variable interest rates, meaning your monthly payment can change, but you only pay interest in the amount you draw.
How to get a home equity loan
You’ll generally be eligible for a home equity loan or HELOC if:
- You have at least 20% equity in your home, as determined by an appraisal
- Your debt-to-income ratio is between 43% and 50%, depending on the lender
- Your credit score is at least 620
- Your credit history shows that you pay your bills on time
What’s the right way to use a home equity loan?
Just because you meet the requirements for a home equity loan or HELOC doesn’t mean it’s a wise choice. Borrowing against your home’s equity is always risky, as the lender can foreclose on your home if you fail to make payments.
Financial experts recommend tapping home equity only when it helps add value to your home, such as repairs or remodeling, but other reasons may include:
- Debt consolidation
- Financial emergencies
- Paying for college
- Protecting your portfolio in retirement
- An alternative to cash-out refinancing when interest rates are rising
Before choosing between a home equity loan or HELOC, be sure you understand the total cost versus benefit, including interest rates, fees, monthly payments and potential tax deductions.
How do I improve my home equity?
If you’re sure all the information entered into the home equity loan calculator is correct and it
shows you have less than 20% equity in your house, you probably won’t be eligible for a loan or HELOC at this time. You may be able to speed up equity growth by:
- Refinancing into a shorter-term mortgage
- Making home improvements that increase value
- Paying a little extra toward your mortgage principal every month
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