What Is Tappable Home Equity?

Many homeowners have built significant home equity recently, but they might be surprised to learn that not all of it is available to borrow.

Lenders usually require homeowners to keep a portion of their home equity free and clear. This requirement can change a homeowner’s borrowing power and ability to access cash, as the amount available to borrow is often less than a homeowner’s total equity.

Here’s what tappable home equity means and how lenders calculate it.

What is tappable home equity?

Tappable home equity is the amount of home equity a lender allows a homeowner to borrow.

Many lenders don’t typically allow homeowners to borrow against all of their home equity. They generally want borrowers to keep a minimum amount of equity in the property.

How is tappable home equity different from home equity?

Home equity is the difference between a home’s current value and what is owed on a mortgage and any other loans secured by the home.

For example, if a home is worth $300,000 and has a remaining mortgage balance of $200,000, a homeowner has $100,000 in total home equity.

However, a lender might require homeowners to keep at least 20% equity in their home, meaning their total loan-to-value ratio can’t exceed 80%. In this example, the most a homeowner could owe against the home is $240,000, or 80% of its value.

Even though the homeowner has $100,000 in home equity, they wouldn’t be able to borrow all of it. Because they already have a $200,000 mortgage balance, the most they could borrow is $40,000. In this example, this homeowner has only $40,000 in tappable home equity.

Why can’t homeowners borrow all of their equity?

Lenders generally require homeowners to keep some equity in the property to reduce their risk of losing money if home values decline or if the borrower stops making payments.

Lenders might calculate and use a loan-to-value ratio to limit their risk.

Each lender sets its own borrowing limit, and the amount available to a borrower may depend on different factors, such as the home’s value, any outstanding mortgage balance, and the borrower’s credit history, credit score and financial profile.

Lenders also don’t typically allow a homeowner to borrow the entire value of a home, even when a home is owned clean and clear without a mortgage.

How can homeowners use tappable home equity?

Qualifying homeowners can access their tappable home equity by borrowing with:

• A home equity loan
• A home equity line of credit
• A cash-out refinance

Why does tappable home equity matter?

A home is often one of the largest financial assets someone has. Many homeowners have built up a significant amount of wealth in their home. They can access that wealth by borrowing against their home equity.

However, homeowners generally can’t borrow against all of their home equity.

Understanding how much of their equity is tappable or accessible can help with financial planning, particularly as the amount of tappable home equity can change over time as home values change and as the mortgage balance is paid over time.

The bottom line

Homeowners should understand their tappable home equity, as it’s not the same as their total home equity. Tappable home equity is the portion of home equity that a lender allows someone to borrow.

---

This post is for informational purposes only and does not provide any financial, investment or tax advice. The information presented may not be suitable for your individual circumstances. Before making any financial decisions, consider consulting a qualified professional who can provide advice based on your specific situation.