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What's the most you should borrow with a home equity loan?

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Borrowing from your home's equity can be a smart way to pay for big expenses, but make sure you know the maximum amount that you should borrow first.  Getty Images

Home equity loans let you borrow from your home — and typically at a lower interest rate than the rates that credit cards, personal loans, and other financial products offer. This makes home equity loans a smart way to pay for renovations or, in many cases, even pay off debt.

If you've been in your home a long time and have built up a lot of equity, they can come in sizable amounts, too — sometimes tens or even hundreds of thousands.

But there's a difference between what you can borrow from your home and what you should. Are you considering taking out a home equity loan? Here's how much you should — and shouldn't — borrow. 

Start exploring your top home equity loan options here.

What's the most you should borrow with a home equity loan?

Most lenders will only let you borrow between 80% and 90% of your home's value — minus your current mortgage loan balance. 

That means if your home is valued at $500,000, and you have a mortgage balance of $210,000, you could potentially borrow $240,000.

If you're not sure how much your home's value is, you can check with your local appraisal district. Just keep in mind that your lender will likely order a new appraisal when you apply, so the final number could be slightly different. 

Now that you know how much you can borrow, you'll want to consider how much you should borrow — because the more you borrow, the higher the risk.

"Borrowing against your home can be a good option if done responsibly, but with any loan, there is risk involved," says Steve Kaminski, head of residential lending at TD Bank. "Your house is being leveraged as collateral. If you fail to make payment, a lender may begin foreclosure proceedings and you could lose your home."

For these reasons, you should only borrow what you need and can comfortably afford to repay. Home equity loans are fixed-rate loans, so whatever you borrow will be spread across your loan term in equal payments. You can typically choose terms between 10 and 30 years, with 30-year home equity loans having the lowest monthly payments.

In the above example, if you borrowed the $240,000 at an 8.75% interest rate (the going rate for home equity loans these days), you'd have a payment of $1,931 per month. Remember that this payment is in addition to the payment you make on your primary mortgage, too, so make sure you have enough income to cover both for the foreseeable future. 

Rebecca Awram, a mortgage advisor at Seniors Lending Centre, recommends keeping your monthly housing costs — mortgage payments, taxes, and utilities included — at 44% of your gross income or less.

Find out today's top home equity loan rates here.

Consider the other home equity loan fees, too

Keep in mind that the monthly payment isn't the only cost that will come with your home equity loan. There are also closing costs and fees. According to Rocket Mortgage, closing costs on a typical home equity loan are between 2% and 6% of the total loan amount.

Though some lenders will let you roll these costs into your loan balance, this means borrowing more and thereby paying more in long-term interest. It also increases your monthly payment and the risk of potential foreclosure. As Awram puts it, "You never want to borrow more than you can afford."

The bottom line

While most lenders will allow you to borrow between 80% and 90% of the equity you've built in your home, it's important to understand that the more you borrow, the higher the risk. You'll need to ensure that you can fit both your mortgage loan payments and your home equity loan payments in your budget before taking out this type of loan, and there are also some extra fees to consider, too. As with any type of loan, you should be sure to understand what you're getting into beforehand so you can make the right decision for your finances.

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