Can You Get a Larger Home Equity Loan If Home Value Rises?

Despite recent interest rate hikes, home values are still rising, with national median listing prices up 14.2% in April 2022 compared to the previous year. If your home’s value continues to climb, does the amount that you can borrow on a home equity loan continue to increase as well?

How a Home Equity Loan Works

A home equity loan is a loan that allows you to borrow a set amount of money against the equity you have in your home. Home equity loans typically offer low or no fees and allow you to pay back your loan with a fixed interest rate and equal monthly payments over a set period of time.

By contrast, a home equity line of credit (HELOC) also allows you to tap your home’s equity but functions more like a credit card, allowing you to use as much or as little of your credit line as you need and pay back variable amounts each month with a variable interest rate.

How Home Equity Is Calculated

Your home’s equity is calculated by taking the current market value of your home and subtracting any loans that you currently have on it. The number that remains is the amount of equity you have in your home. To get your equity percentage, you would divide the amount of equity you have in your home by the current market value of your home.

Calculating Your Home’s Market Value

It can be tempting to use the estimated value of your home from Zillow or Redfin, but these estimates aren’t always accurate. Unless you recently had an appraisal done, you’ll likely need to pay for a separate appraisal to be completed to get a home equity loan. Online estimates are a great starting point, but calculate your home equity yourself so you know a ballpark figure of what you’ll qualify for. Do a little bit of extra research into recent home sales in your neighborhood, and be sure to adjust for the current condition of your own home. Since home values are changing quickly in current market conditions, be sure to check back on your numbers monthly so you don’t get a big shock after you’ve paid for an appraisal.

Dangers of a Home Equity Loan

Home equity loans have several pros and cons that should be weighed, in addition to considering their risks, before taking one out. Since home equity loans use the equity in your home as collateral, you could lose your home if you can’t keep up with payments. In general, you should only take out a home equity loan to fund a project that will increase your home’s value.

The Bottom Line

Home equity loans are based on the amount of equity you have in your home. If your home’s value rises, the amount of equity you have in it rises, and the amount that you can take out for a home equity loan increases proportionally.