Your home’s equity can be a valuable financial resource, accessible through options like cash-out refinancing, home equity loans, or Home Equity Lines of Credit (HELOCs). However, lenders establish equity cash-out limitations—maximum borrowing limits based on a percentage of your home’s appraised value—to protect both parties involved.
These limits are primarily defined by the loan-to-value (LTV) ratio, which compares the total loan amount to the home’s appraised value. For most cash-out transactions, lenders cap the LTV around 80%, although this can vary depending on loan type and borrower qualifications. For example, conventional loans commonly set an 80% LTV limit, FHA loans also typically allow up to 80%, while VA loans may permit up to 90% in certain cases. Jumbo loans generally have stricter caps, often around 70–75%. HELOCs and home equity loans may offer slightly higher limits but depend heavily on creditworthiness.
For a clear illustration, if your home is valued at $500,000 and you owe $250,000 on your mortgage, an 80% LTV limit means your total loan balance can max out at $400,000. That leaves $150,000 available for cash-out, minus closing costs which usually range between 2-5% of the loan amount.
Why do these rules exist? For lenders, maintaining an equity cushion reduces the risk of loan default and foreclosure losses if property values decline. For borrowers, these limits prevent borrowing more than the home’s value, helping avoid a situation known as being “underwater,” where mortgage debt exceeds home value.
Additional factors can influence your personal cash-out limit, including your credit score, debt-to-income (DTI) ratio, property type, and specific lender overlays—extra requirements lenders may apply beyond baseline guidelines. Some states have unique regulations; for example, Texas enforces an 80% combined LTV limit for cash-out refinances, alongside other protections.
Common pitfalls to watch out for include underestimating closing costs, relying on online home value estimates (such as Zillow’s Zestimate) instead of official appraisals, and not comparing offers from multiple lenders. It’s also important to have a clear purpose for withdrawing equity, like consolidating high-interest debt or funding home improvements, rather than using it for non-essential expenses.
Understanding equity cash-out limitations helps you make informed decisions when leveraging your home’s value. For more details, see our guide on the Loan-to-Value Ratio (LTV) and learn about different Home Equity Line of Credit (HELOC) options.
References:
- Consumer Financial Protection Bureau: Loan-to-Value Ratio Explained
- U.S. Department of Housing and Urban Development (HUD): FHA Cash-Out Guidelines
- U.S. Department of Veterans Affairs (VA): VA Cash-Out Refinance
- NerdWallet: Cash-Out Refinance Basics
For additional help with related topics, visit FinHelp’s glossary entries on Loan-to-Value Ratio (LTV) and Home Equity Line of Credit (HELOC).