Paying a mortgage bill each month isn't much fun. But having a mortgage does give you some financial flexibility: You can borrow money from it to pay off credit-card debt, help pay for your children's college educations, finance that kitchen renovation or pay for a long-awaited cruise. How much you can borrow from your mortgage loan, though, depends upon how much you owe on it and how much your home is worth.
The amount of equity you have in your home is key to determining how much you can borrow from your mortgage. Equity is the difference between what you owe on a mortgage and how much your home is worth. If your home is worth $200,000 and you owe $120,000 on your mortgage loan, you have $80,000 in equity. Lenders will allow you to borrow a percentage of your equity. This percentage varies depending on lender. But if you have $80,000 equity, you should be able to borrow $50,000 or more, depending on your lender.
Lenders, though, do limit the amount of money homeowners can borrow from their mortgage, even if they do have a large amount of equity. For instance, Bank of America, as of late 2012, allows homeowners to borrow a maximum of $500,000 in the form of a home equity loan.
Types of Equity Loans
You can borrow against your mortgage using one of two loan products, a home equity loan or a home equity line of credit. A home equity loan is a second mortgage loan. When you take out such a loan, you'll receive a lump sum payment that you then have to pay back, with interest, in regular installments at a set interest rate. A home equity line of credit works more like a credit card, with the limit tied to your home equity. You can borrow against this line of credit whenever you want, up to your maximum limit. You then make regular payments as if you were making traditional credit-card payments. You don't always have to maintain a balance with a home equity line of credit.
To determine how much you can borrow from your mortgage loan, you'll first need your home appraised. Your mortgage lender will send an appraiser to your home to determine its current market value. You have to pay for this service; the Federal Reserve Board estimates that it can cost up to $444 for an appraisal, depending on the size of your home and where you live.