A 95 LTV HELOC is a home equity line of credit that lets you borrow up to 95% of your home’s value, giving you a lot of flexibility to cover big expenses like home renovations or large purchases. However, this type of HELOC can be trickier to qualify for and comes with some potential risks due to its high loan-to-value (LTV) ratio.
At RenoFi, we help homeowners understand their home renovation financing options. That’s why we’ve put together this guide to help you understand the ins and outs of 95% LTV HELOCs, including how to qualify, the pros and cons, and some smart ways to use the loan. This way, you can know what to expect and make a more informed decision about whether this financial product is right for you.
Note that although 95% LTV HELOCs do provide an increased borrowing power, it may still not be enough to cover your home renovation expenses if you’re light on equity. RenoFi offers a unique loan that allows homeowners to go over 100% LTV by leveraging the After-Renovation Value of your home.
Understanding 95% LTV HELOCs
If you want to tap into your home’s equity to cover major expenses, a 95% LTV HELOC lets you borrow a significant portion of that equity ― up to 95% of its appraised value. This credit is way more than the standard HELOC limit of around 80% to 85% LTV.
Although it may not seem like much, the difference between 85% and 95% LTV can be huge. It can actually give you access to tens of thousands of extra dollars.
But here’s the thing: because you’re borrowing so much, lenders usually see it as riskier. That means you could end up paying higher interest rates. Plus, you’ll have stricter requirements, such as a high credit score and/or low debt-to-income (DTI) ratio.
In other words, before you jump in, it’s super important to take a close look at your finances and weigh the pros and cons.
Why You Might Need a High LTV HELOC
Home Improvement Projects
Many homeowners take out high LTV HELOCs for home renovations. Having a flexible line of credit that you can easily tap into is super helpful, especially when handling a major renovation project where it’s hard to know the total cost from the start. With a much bigger credit limit, you can easily cover unexpected expenses as they pop up.
College Expenses
Budgeting for college can be tough, and for many parents, it is a big financial burden. Having access to a high LTV HELOC gives you a financial safety net with a reasonable interest rate. This way, you can confidently manage both the expected and unexpected financial demands that come with seeing your kids through college.
Debt Consolidation
Paying off high-interest debt with a lower-interest HELOC can be a smart move. Credit cards and personal loans typically have higher interest rates because they usually aren’t backed by any collateral. On the flip side, HELOCs are backed by your home, which is why they offer lower rates and longer terms. This means you’ll be paying smaller monthly payments.
Emergency Expenses
Life can be unpredictable, and unexpected expenses can pop up at any moment. That’s why having access to a large line of credit can be a huge relief. Whether you’re facing a medical emergency or other unexpected expenses, a high LTV HELOC can provide the funds you need quickly and efficiently.
Business Financing
If you’re a small business owner or an entrepreneur, a high LTV HELOC can be a great way to get the funds you need to grow your business. You can use the money for startup costs, buying inventory, or expanding your operations. This option gives you more flexibility than traditional business loans.
HELOCs vs Other Home Equity Products
When considering a 95% LTV HELOC, it’s helpful to know how it stacks up against other ways to use your home equity. Here’s a quick rundown:
Home Equity Loans
- Fixed Interest: Home equity loans have fixed interest rates, which means your monthly payments stay the same. This removes the guesswork from budgeting since you know exactly how much you’ll pay in interest well in advance.
- Lump Sum: You get all the money at once, making it useful for big, one-time expenses such as a major renovation.
- Less Flexibility: With a home equity loan, the repayment terms are fixed, so you don’t have the flexibility to borrow more later like you do with a HELOC.
Cash-Out Refinance
- Refinance Your Mortgage: This option replaces your current mortgage with a new, larger one, and you get the difference in cash.
- Potentially Lower Rates: You might get a lower interest rate than with a HELOC, but it also means extending the length of your mortgage.
- Higher Costs: Cash-out refinancing usually comes with higher closing costs and fees compared to a HELOC.
Personal Loans
- No Collateral Needed: Personal loans are unsecured, so you don’t have to use your home as collateral. This means less risk to your home.
- Higher Interest Rates: Because there’s no collateral, interest rates are usually higher than with a HELOC.
- Fixed Payments: Personal loans have fixed interest rates and monthly payments, so it’s easy to predict them.
How to Qualify for a 95 LTV HELOC
To qualify for a 95% LTV HELOC can be tougher than meeting the requirements for loans with lower LTV ratios. Here are the key things lenders typically check when deciding if you qualify:
Good Credit Score
Most lenders will require a credit score of 700 or higher to approve you for a 95% LTV HELOC. A strong credit score shows you can manage debt responsibly.
Stable Income and Employment
You’ll need to show proof of steady income and stable employment. This may include employment verification, tax returns, and recent pay stubs. Lenders want to see a reliable source of income to ensure you can make regular payments.
Low Debt-to-Income Ratio
A low DTI ratio is important for a high LTV HELOC. Lenders prefer a DTI ratio below 43%, as this shows that your monthly debt payments do not exceed 43% of your gross monthly income. In other words, you are more likely to handle additional debt better.
Significant Home Equity
Since a 95% LTV HELOC allows you to borrow a large portion of your home’s value, lenders will only be willing to offer such a large loan to homeowners with substantial existing equity in their homes. Typically, lenders will appraise your home to determine its current market value and your available equity.
Positive Payment History
If you have a history of paying your existing mortgage and other debts on time, it can boost your credibility with lenders. On-time loan repayments show that you are likely to make timely payments on the HELOC as well.
Comprehensive Documentation
When applying for a 95% LTV HELOC, you’ll need to gather some important documents. Here’s what you’ll typically need:
- Government-issued ID
- Proof of income (pay stubs, tax returns)
- Employment verification
- Current mortgage statement
- Homeowners insurance policy
RenoFi Loans as an Alternative
While a 95% HELOC does help homeowners get a loan to pay for a home renovation, it often isn’t enough, especially if they’re light on equity. RenoFi offers a new solution by letting you borrow against the future value of your property post-renovation, rather than borrowing against its current value.
For example, imagine your home is currently valued at $500,000 and your outstanding mortgage balance is $400,000. You are planning a renovation and expect that the after renovation value of your home would be approximately $640,000. Your current loan-to-value ratio (LTV) is at 80%, which means that you effectively can’t borrow anything to fund your renovation. A RenoFi loan, however, would allow you to go as high as 150% LTV or 90% LTV using the after renovation value.
So in this example, while using a standard home equity loan results in your borrowing power being $0, a RenoFi loan allows you to borrow up to $176,000 thanks to the after renovation value of your home!
If you are considering a home renovation, RenoFi is by far the smartest way to finance your project. Learn more and explore your borrowing options here.
If you’re considering a home renovation and need a HELOC that gives you greater borrowing power, exploring RenoFi’s options might be the perfect solution for you.
Where to Find Lenders for a 95% LTV HELOC
If you’re looking for a high LTV HELOC, you might want to consider smaller lenders like local credit unions and community banks. These lenders often offer higher LTV ratios than larger banks and nationwide lenders, which usually cap their HELOCs at 80% or 85% of your home’s value.
To apply for a HELOC at a local credit union, you’ll probably need to meet some basic membership requirements, such as being a resident of your state or working for a qualifying employer.
Local banks are typically easier to work with since they usually don’t have membership requirements, making it easier to apply for a 95% LTV HELOC without any extra hoops to jump through.
Calculating Your Maximum HELOC Loan
While a standard HELOC uses your home’s value multiplied by the LTV to determine the maximum loan amount, a 95% LTV HELOC considers the Combined Loan-to-Value (CLTV). CLTV combines how much you currently owe on your home with the potential HELOC amount. Keep in mind that most lenders offering a 95% LTV HELOC likely have a maximum CLTV of around 80% to 85%.
To calculate your maximum HELOC loan:
- Start by betting a professional appraisal to determine your home’s current market value. Let’s say your home is appraised at $400,000.
- Next, multiply your home value by the maximum CLTV allowed by your lender (e.g., 85%). In this case, $400,000 x 85% = $340,000. This $340,000 is the maximum combined value of your existing mortgage and the potential HELOC.
- To estimate your HELOC limit only, subtract your existing mortgage balance from the combined maximum amount. Let’s say you still owe $250,000 on your home. Then, $340,000 - $250,000 = $90,000.
This $90,000 is a ballpark figure for your potential HELOC borrowing limit with a 95% LTV HELOC.
Keep in mind that this is just an estimate. Each lender has specific things they look out for when deciding if you qualify for a HELOC, and some may not offer the full 95% LTV. Factors such as your income, credit score, and other debts will affect your final eligibility and borrowing limit.
HELOC Interest Rates
Most HELOCs come with variable interest rates, meaning they can fluctuate over time. Typically, the interest rate you pay is calculated based on an index rate and other factors such as your credit score and debt.
Lenders consider you a low-risk borrower if you have a strong credit score and low debt, meaning you’ll likely get a lower rate. On the other hand, you’ll pay more in interest if you’re considered a high-risk borrower.
Before you sign the dotted line for a high LTV HELOC, here are some questions to ask to help you understand how your rate might change over time:
- What’s the base rate used? Is it the prime rate or something else?
- How much extra will you be charged on top of that base rate?
- How often can the rate change?
- How much can the rate increase at one time?
- Is there a limit to how high the rate can go over the loan’s lifetime?
- Can you switch to a fixed rate later?
- Is the initial rate discounted? If so, for how long? How much will it increase when the discount ends?
- Is the initial rate lower than the regular rate? If so, for how long does it last? And how much will the rate increase when the discount period is over?
High LTV HELOC Advantages
- Access to More Funds: You can borrow up to 95% of your home’s value, which is more than traditional HELOCs that usually offer up to 80% LTV.
- Flexibility: You can borrow and repay funds as needed, which is great for managing expenses and debt.
- Lower Payments: Since you only pay interest on the borrowed amount during the draw period, your monthly payments can be lower compared to other forms of credit.
- Tax Benefits: The interest paid on a HELOC may be tax-deductible, especially if you use the loan for things like making repairs to your home’s structure or remodeling certain spaces in your home.
- Boost to Credit: Making timely payments on a HELOC can improve your credit score.
High LTV HELOC Disadvantages
- Risk to Your Home: With a 95% LTV HELOC, there’s a higher risk of losing your home if you can’t keep up with payments or the value of your property drops.
- Higher Interest Rates: High LTV HELOCs usually come with higher interest rates because it puts lenders in riskier positions.
- Less Home Equity: Borrowing up to 95% of your home’s value leaves you with very little equity. This can increase your financial risk if there’s a drop in property value.
- More Debt Pressure: Taking out a high LTV HELOC means you’re increasing your debt. This might put a strain on your finances and affect your credit score.
Making Informed Decisions With 95 LTV HELOC
HELOCs can be very helpful for financing major projects, such as renovating your home. Remember, it’s super important to carefully plan and understand your borrowing options before you opt for this financial product.
If you need help with home renovation financing, consider RenoFi. We specialize in helping homeowners leverage their home equity to achieve their renovation goals. RenoFi loans are the smartest way to finance a home renovation project.
Unlike traditional loans, which are based on your current home value or require you to refinance your primary mortgage and give up your low rate, RenoFi loans are based on the After Renovation Value of your home. This allows you to borrow on average 11x more, get a low monthly payment, and keep your low rate on your first mortgage.
Contact us today to explore your options and get started on creating your dream space.
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