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How much home equity should you borrow?

How much home equity you should borrow depends on several factors. Getty Images

Tapping into your home equity can be an easy and cost-effective way to finance everything from home improvements to debt consolidation. Interest rates on home equity loans and HELOCs are significantly lower than other financing options, and depending on how you use the funds, you may even qualify for a tax deduction.

However, as with any financial strategy, it's important to be smart about it. Identifying the right amount of home equity to borrow can help you ensure you meet your goals without overextending yourself or endangering your home investment.

In this article, we'll explore how to find the number that works best for you.

Explore current home equity rates here now to see what you're eligible for.

How much home equity should you borrow?

When figuring out how much home equity you should take out, ask yourself the following three questions.

How much do you have?

How much equity you have in your home determines how much you can borrow. To calculate your home equity, subtract your mortgage balance from your home's current market value.

For example, imagine you bought your home for $300,000. You've made $50,000 in payments toward your principle, bringing your mortgage balance to $250,000. Thanks to appreciation, your home is now worth $400,000. That means your home equity is $150,000 ($400,000 minus $250,000).

Lenders typically allow you to borrow up to 85% of your home equity. So, if you have $150,000 in equity, you may be able to borrow up to $127,500.

How much home equity can you borrow? Compare your options here.

How much do you need?

Just because you could borrow up to 85% of your equity, that doesn't mean that you should. The amount you borrow affects your rate, so if you take out more than you really need, you could pay a higher rate for money you won't even use. Take the time to pinpoint a number that will realistically cover your expenses.

And don't be tempted to borrow more than you think you need "just in case." If you want a home equity loan for home renovations, for example, factor unexpected costs into your estimate and don't go over that. Should your expenses start ballooning as the project goes on, consider adjusting your vision to fit your budget rather than the other way around (a good rule in general, not just for home equity borrowing).

If you're genuinely not sure how much you'll need and you'd like a little wiggle room, a HELOC may be better for you. You can withdraw what you need as you need it, and you'll only pay interest on what you borrow. That said, you'll still want to be smart about how high a line of credit you request since the amount will impact your interest rate.

How much can you afford?

Home equity loans and HELOCs can be a smart way to fund a wide variety of expenses. However, you should only take one out if you're confident you can comfortably make the payments on time each month.

Remember, these financing options are secured by your house. If you default, you could lose your home. And even if you stay on top of the payments, you don't want them to crunch your budget so tightly that it hurts your finances in other ways.

So, review all of an offer's terms before signing on the dotted line, taking into account your current budget and your expected future financial situation. Make sure to factor in closing costs, such as origination, appraisal and filing fees. You'll pay these costs at closing, or they'll be rolled into your loan balance (resulting in higher total interest paid).

Begin exploring your options online now!

The bottom line

Determining how much home equity you should borrow requires careful consideration and honesty about your needs and goals. Take the time to run the numbers so the amount you land on best serves your situation now and in the future, and reach out to a financial advisor if you need further guidance.

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