As a homeowner, you enjoy many benefits that renters don’t. One of the biggest is the ability to tap into your home equity, turning it into cash you can use right away.
What can you do with the cash? Home remodeling, debt consolidation, funding a retirement or college savings plan, and purchasing more real estate are the most popular uses, but you can do practically anything you want.
Today, homeowners have more options than ever to access their home equity. And that’s where the problem comes in.
With so many choices, it can feel overwhelming and confusing trying to figure out what’s right for you. The last thing you want to do is rush in unprepared and later regret it.
In this article, I will help you make sense of it all so you can understand what’s available and best for you, empowering you to make a smart decision you’ll always look back on with delight.
How much cash do you have in mind?
That’s an important question — and a great place to start — because the answer determines your new loan-to-value ratio (LTV), and not all home equity loan programs are created equal. Some programs are capped at 70% LTV and others at 95%.
Add the amount of money you want to your mortgage balance, then divide the sum by your home’s value. That’s a quick estimate of what your new loan-to-value would be after cashing out some of your home equity. This is referred to as cumulative loan-to-value, or CLTV.
For example, if your home is worth $900,000 and you owe $600,000 on your mortgage, cashing out $165,000 of your equity would give you an LTV of 85%. $165,000 cash-out + $600,000 mortgage balance = $765,000
$765,000 / $900,000 home value = 85% LTV
Once you’ve estimated your new loan-to-value, you can match it to the programs that fit your needs.
Keep reading and I’ll show you the loan-to-value limits for the 8 most popular home equity programs, plus the pros and cons of each. This will simplify things for you and help you understand what to do next.
1. Conventional cash-out refinance
A cash-out refinance is a mortgage loan that replaces your current mortgage with a larger one, giving you cash at closing.
There are a few different versions and the first one we’ll look at is a conventional cash-out refinance that follows the guidelines and restrictions set by Fannie Mae (FNMA) or Freddie Mac (FHLMC).
Fannie and Freddie are government-sponsored enterprises and do not actually lend money. Instead, they purchase loans made by mortgage lenders.
Conventional loan-to-value limits
One of the nice things about the conventional cash-out refinance program is that it’s available for property uses other than a primary residence and property types of up to four units.
The combination of property use and type is what determines your maximum loan-to-value.
Conventional Loan-To-Value Limits
| Property Type | Primary Residence | Vacation Home | Investment Property |
|---|---|---|---|
| 1 unit | 80% | 75% | 75% |
| 2 unit | 75% | Not allowed | 70% |
| 3 to 4 unit | 75% | Not allowed | 70% |
One unit includes single-family homes, condominiums, and townhomes.
Your new loan amount must also be within the conventional loan limit for the county where your property is located.
If the loan-to-value ratio you estimated earlier fits into the conventional LTV limit for your property use and type, a conventional cash-out refinance may be worth considering.
Conventional Pros
- Available for single-family homes, condominiums, townhomes, and 2 to 4 unit properties
- Available for primary residences, vacation homes, and investment properties
- Maximum debt-to-income ratio (DTI) allowed is 50%
- Closing costs can be included in the new loan instead of being paid out of pocket
- Property tax and home insurance impounds are optional
- Program is available even if your home is paid off
Conventional Cons
- Your mortgage payment and interest costs could go (way!) up if you are refinancing to a higher rate
- Although underwriting guidelines allow credit scores down to 620, the best rates for conventional cash-out refinances are available to homeowners with credit scores of 680 and up.
- At least 12 months must have passed between the closing date of the previous transaction and the closing date of the new cash-out refinance.
2. FHA cash-out refinance
This program also replaces your current mortgage with a larger one and gives you cash at closing.
Like Fannie Mae and Freddie Mac, the government’s Federal Housing Administration (FHA) does not lend money. They provide mortgage insurance that protects mortgage lenders against losses.
FHA loan-to-value limits
The FHA does not allow for cash-out refinancing of properties used for any purpose other than a primary residence.
FHA Loan-To-Value Limits
| Property Type | Primary Residence | Vacation Home | Investment Property |
|---|---|---|---|
| 1 unit | 80% | Not allowed | Not allowed |
| 2 unit | 80% | Not allowed | Not allowed |
| 3 to 4 unit | 80% | Not allowed | Not allowed |
One unit includes single-family homes, condominiums, and townhomes.
An FHA cash-out refinance may be right for you if you live in the home and your new LTV will be 80% or less. You’ll also want to check FHA’s loan limit for the county where your home is located.
FHA Pros
- Credit scores down to 580 are allowed
- Homeowners with lower credit scores are offered rates very close to the rates offered to those with excellent credit
- Rates are lower than conventional cash-out refinance rates
- Available for single-family homes, condominiums, townhomes, and 2 to 4 unit properties
- Maximum debt-to-income ratio (DTI) allowed is 57%. (There is also a maximum 47% housing expense requirement.)
- If you’re refinancing an FHA loan that is 3 years old or less, you receive a partial refund of the Upfront Mortgage Insurance Premium (UFMIP) you paid last time
- Closing costs can be included in the new loan instead of being paid out of pocket
- Program is available even if your home is paid off
FHA Cons
- Your mortgage payment and interest costs could go (way!) up if you are refinancing to a higher rate
- Not available for vacation homes or investment properties
- All FHA loans charge an Upfront Mortgage Insurance Premium (UFMIP) and annual Mortgage Insurance Premium (MIP). The Upfront Mortgage Insurance Premium is financed into the new loan and the annual Mortgage Insurance Premium is divided into 12 installments and included in the monthly payment.
- If you recently closed on your current loan, you’ll have to wait before applying. Both of these requirements must be met: (1) There must be 210 days between the first payment due date of the existing mortgage and the first payment due date of the new loan. (2) Six months of payments must be made prior to application.
3. VA cash-out refinance
If you’re currently serving in the U.S. military or you’ve been honorably discharged, you’re likely eligible for a VA loan.
The U.S. Department of Veterans Affairs (VA) offers two types: VA direct and VA-backed.
The VA direct program is only available to Veterans who are Native American (or their spouse is) and the VA serves as the mortgage lender.
For all others, the VA depends on private mortgage lenders to make the loans. The VA protects the lenders against loss by guaranteeing a portion of the mortgage loan.
With either program, an eligible Veteran or their surviving spouse can cash out their home equity by paying off their current mortgage and replacing it with a larger one.
VA loan-to-value limits
Unlike other cash-out refinance programs that limit the new loan to 80% of the home’s value, the VA’s program allows the homeowner to borrow up to 100% of the home’s value, up to $2,000,000.
VA Loan-To-Value Limits
| Property Type | Primary Residence | Vacation Home | Investment Property |
|---|---|---|---|
| 1 unit | 100% | Not allowed | Not allowed |
| 2 unit | 100% | Not allowed | Not allowed |
| 3 to 4 unit | 100% | Not allowed | Not allowed |
One unit includes single-family homes, condominiums, and townhomes.
If you’re an eligible Veteran or surviving spouse looking to access more than 80% of your home’s value, the VA cash-out refinance is worth checking out.
VA Pros
- Credit scores down to 580 are allowed
- Veterans with lower credit scores are offered rates very close to the rates offered to those with excellent credit
- Rates are lower than conventional cash-out refinance rates
- Available for single-family homes, condominiums, townhomes, and 2 to 4 unit properties
- Maximum debt-to-income ratio (DTI) may be as high as 60%
- Closing costs are less than other cash-out refinance programs
- Closing costs can be included in the new loan instead of being paid out of pocket
- No mortgage insurance
VA Cons
- Your mortgage payment and interest costs could go (way!) up if you are refinancing to a higher rate
- Not available to everyone. You must be an eligible Veteran or surviving spouse.
- Not available for vacation homes or investment properties
- Not available if you own your home free and clear
- Unless you’re receiving disability from the VA, all VA loans charge a VA Funding Fee (VAFF). The VA Funding Fee is financed into the new loan.
- If you recently closed on your current loan, you’ll have to wait before applying. Both of these requirements must be met: (1) There must be 212 days between the first payment due date of the existing mortgage and the first payment due date of the new loan. (2) Six months of payments must be made prior to application.
4. Jumbo cash-out refinance
Jumbo mortgages have loan amounts greater than Fannie Mae and Freddie Mac loan limits and jumbos greater than $5,000,000 are called super jumbo mortgages.
A jumbo cash-out refinance replaces your existing mortgage with a larger one, allowing you to access more home equity from your high-value property.
Jumbo loan-to-value limits
Private lenders set their own guidelines and limits for jumbo loans, not Fannie Mae, Freddie Mac, or the Federal Housing Administration.
For that reason, one lender may limit their loan-to-value ratio at 80%, while another may allow for a higher LTV.
Some of the factors affecting LTV limits are property use, credit score, debt-to-income ratio (DTI), and loan amount.
Here is an example of a jumbo cash-out refinance with a loan amount up to $3 million.
Example Jumbo Loan-To-Value Limit
| Credit Score | Primary Residence | Vacation Home | Investment Property |
|---|---|---|---|
| 660+ | 89.99% | 89.99% | 80% |
If you own a high-value property and want to access the most cash by refinancing, the jumbo cash-out refinance program deserves a closer look.
Jumbo Pros
- Credit scores down to 660 are allowed
- Allows for the largest loan amounts
- Rates are lower or competitive compared to conventional cash-out refinance rates
- Available for single-family homes, condominiums, townhomes, and 2 to 4 unit properties
- Available for primary residences, vacation homes, and investment properties
- Debt-to-income ratio (DTI) up to 49.99%
- Closing costs can be included in the new loan instead of being paid out of pocket
- Property tax and home insurance impounds are optional
- Program is available even if your home is paid off
Jumbo Cons
- Your mortgage payment and interest costs could go (way!) up if you are refinancing to a higher rate
- A second appraisal may be required to support the value
- Cash reserves may be required
- Investment properties may be subject to a prepayment penalty
5. Non-QM cash-out refinance
Any home loan that does not meet the documentation requirements of a qualified mortgage (QM) as defined by the Consumer Financial Protection Bureau (CFPB) is considered a non-qualified mortgage loan (non-QM).
Non-QM loans allow you to qualify using methods other than income from your job or tax returns. Alternative methods include bank deposits or profit & loss statements for business owners or assets instead of income for individuals with substantial investments.
A non-QM cash-out refinance replaces your existing mortgage with a larger one and gives you cash at closing.
Non-QM loan-to-value limits
Unlike qualified mortgage loans such as conventional, FHA and VA, the loan-to-value limits of non-QM loans vary based on credit score.
The property type and use also impacts the amount of money you can access from your home equity.
Notice the differences between these two charts. The first chart is for 1-unit homes and the second is for 2-to-4 unit homes.
Example: Non-QM Loan-To-Value Limits For 1-Unit Homes
| Credit Score | Primary Residence | Vacation Home | Investment Property |
|---|---|---|---|
| 740 | 80% | 70% | 70% |
| 700 | 75% | 70% | 70% |
| 660 | 60% | 60% | 70% |
One unit includes single-family homes, condominiums, and townhomes.
Example: Non-QM Loan-To-Value Limits For 2 to 4 Unit Homes
| Credit Score | Primary Residence | Vacation Home | Investment Property |
|---|---|---|---|
| 740 | 70% | Not allowed | 70% |
| 700 | 70% | Not allowed | 70% |
| 660 | 60% | Not allowed | 60% |
If you don’t have the traditional income documentation required for a qualified mortgage, look into a non-QM cash-out refinance if the loan-to-value limit meets your needs.
Non-QM Pros
- Options for self-employed individuals and those with significant investments who do not qualify using employment or tax returns
- Available for single-family homes, condominiums, townhomes, and 2 to 4 unit properties
- Available for primary residences, vacation homes, and investment properties
- Maximum debt-to-income ratio (DTI) may be as high as 55%
- Closing costs can be included in the new loan instead of being paid out of pocket
- Property tax and home insurance impounds are optional
- Interest-only programs are available
- Program is available even if your home is paid off
Non-QM Cons
- Your mortgage payment and interest costs could go (way!) up if you are refinancing to a higher rate
- Rates are higher than qualified mortgages
- Closing costs are higher than qualified mortgages
- Cash reserves may be required
- Investment properties may be subject to a prepayment penalty
6. Home equity line of credit
So far, all of the options we’ve looked at are cash-out refinances that pay off your existing mortgage and replace it with a new one.
A home equity line of credit (HELOC) is different because it keeps your current mortgage in place and adds a second loan.
A HELOC also provides a lot of flexibility. For example, if you have a $200,000 home equity line of credit and only need to use $20,000 now, you have $180,000 you can access later without having to go through the loan approval process again.
HELOC loan-to-value limits
The loan-to-value ratio for a home equity line of credit is actually called home equity combined loan-to-value or HCLTV.
If your home value is $900,000 and you owe $450,000 on your mortgage, your loan-to-value is 50%. Take out a $315,000 home equity line of credit and your HCLTV is 85%.
$450,000 / $900,000 = 50% LTV
$450,000 + $315,000 = $765,000. Divided by $900,000 home value = 85% HCLTV
Credit score is the #1 factor in determining the maximum HCLTV.
Example: HELOC Home Equity Combined Loan-To-Value Limits
| Credit Score | Primary Residence | Vacation Home |
|---|---|---|
| 700 | 95% | 80% |
| 680 | 90% | Not allowed |
| 660 | 80% | Not allowed |
A home equity line of credit may be right for you if you need a loan-to-value above 80% or your existing mortgage has a much lower rate than a HELOC.
HELOC Pros
- Convert more home equity into cash compared to cash-out refinance programs
- Keep your existing mortgage in place (great if your primary mortgage is a low interest rate!)
- Withdraw home equity from your line of credit as you need it without having to be re-approved
- Available for primary residences and vacation homes
- Maximum debt-to-income ratio (DTI) allowed is 50%
- Closing costs are much lower than a cash-out refinance
- Closing costs can be included in the new loan instead of being paid out of pocket
- Program is available even if your home is paid off
HELOC Cons
- Variable rate that can fluctuate
- Not available for investment properties
- Subject to a minimum first draw amount whether you want that much cash or not
7. Home equity loan
Just like a home equity line of credit, a home equity loan (HELOAN) adds a second loan and doesn’t touch your existing mortgage.
But unlike a home equity line of credit, you’re required to take the full amount all at once instead of being able to withdraw additional funds later.
HELOAN loan-to-value limits
The loan-to-value ratio for a home equity loan is called combined loan-to-value or CLTV.
Add your existing mortgage balance to your HELOAN balance and divide the sum by your home value. That’s your combined loan-to-value ratio.
For example, if your home is worth $900,000 and you owe $600,000 on your mortgage, tapping into your home equity with a $210,000 HELOAN would give you a CLTV of 90%.
$600,000 + $210,000 = $810,000. Divided by $900,000 home value = 90% CLTV
Similar to a HELOC, credit score is the #1 factor in determining the maximum amount of cash available to you.
Example: HELOAN Combined Loan-To-Value Limits
| Credit Score | Primary Residence | Vacation Home | Investment Property |
|---|---|---|---|
| 700 | 95% | 90% | 85% |
| 680 | 90% | 90% | 85% |
| 660 | 80% | 80% | 80% |
| 640 | 70% | 60% | 60% |
If you have a low rate on your existing mortgage or want to tap into more cash than a cash-out refinance can provide, add a home equity loan to the list of options you’re comparing.
HELOAN Pros
- Convert more home equity into cash compared to cash-out refinance programs
- Keep your existing mortgage in place
- Fixed rate so no guessing game of what your monthly payments will be
- Available for primary residences, vacation homes, and investment properties
- Maximum debt-to-income ratio (DTI) allowed is 50%
- Closing costs are much lower than a cash-out refinance
- Closing costs can be included in the new loan instead of being paid out of pocket
- Program is available even if your home is paid off
HELOAN Cons
- Subject to a minimum loan amount whether you want that much cash or not
8. Reverse mortgage
A reverse mortgage replaces your current mortgage (if you have one) and gives you cash from your home equity without you having to make a monthly payment.
There are two types: Home Equity Conversion Mortgages (HECM) and proprietary reverse mortgages.
The HECM program is insured by the Federal Housing Administration (FHA) and available to homeowners age 62 and older.
Proprietary reverse mortgage programs are available to homeowners 55 and up, and for people with home values that exceed the maximum value set annually by the FHA.
Reverse mortgage loan-to-value limits
The maximum loan-to-value for a reverse mortgage depends heavily on the homeowner’s age. An older homeowner can access more home equity than one who is younger.
Other factors affecting LTV are the rate type (fixed or variable), program (HECM or proprietary), interest rate, and program caps on home value.
Notice the differences by age on a HECM for a property with a value of $1,089,300 or less.
HECM Loan-To-Value Example
| Age | Fixed Rate | Variable Rate |
|---|---|---|
| 62 | 33.4% | 40.3% |
| 72 | 39.3% | 46% |
| 82 | 49.1% | 55% |
| 92 | 63.5% | 67.8% |
HECM loan-to-value ratios vary based on age, interest rate, margin, and whether or not the home value exceeds the maximum value set annually by the FHA. Maximum value for 2023 is $1,089,300.
If you meet the age requirement and have enough home equity, a reverse mortgage will do more than just allow you to cash out some of your equity. It also frees you from making a monthly payment.
Reverse Mortgage Pros
- Never make a mortgage payment for as long as you live in the home as your primary residence
- If there is enough home equity, you can choose to receive a lump sum payment at closing, monthly payments, a line of credit, or a combination of these
- Very little income is required to qualify compared to a cash-out refinance, HELOC or home equity loan
- Proprietary programs are available for homes with a value exceeding the annual HECM home value limit
- Available for single-family homes, condominiums, townhomes, and 2 to 4 unit properties
- Closing costs can be included in the new loan instead of being paid out of pocket
Reverse Mortgage Cons
- With the HECM program, homes with a value above the value limit are eligible but the value is capped at the annually adjusted limit
- Loan fees are higher than a cash-out refinance
- The loan balance goes up over time because accrued interest is added to the loan and no mortgage payments are being made
- Not available for vacation homes or investment properties
- Tax liens and HOA payments in arrears can affect qualifying
What’s right for you?
Now you have a solid understanding of what’s available to you and which home equity programs let you tap into the amount of money you’re looking for.
Start by estimating your new loan-to-value ratio and match it to the home equity programs that meet your needs.
And remember – if you have a low rate on your existing mortgage, it’s likely that your best option is to keep it in place and go for a home equity line of credit or home equity loan.
You made a smart investment in your home and converting some of your home equity into cash can be a smart move too.
If you’re looking for an easy way to track your home equity, sign up for your House Numbers today.
