How Much Equity Do You Need for a HELOC?

The equity you have in your home is one of your most powerful financial tools. Build up enough of it, and you’ll see big profits when you sell. You can even turn it into cash while you still own the home.

Home equity loans are one of the most common methods used to turn a portion of your equity into a lump sum payment to use as you wish. HELOCs — or home equity lines of credit — are another popular strategy. These work more like credit cards, letting you withdraw from your home equity (up to a certain amount) over time as needed. 

HELOCs can be good for home renovations, when you need extended access to cash, or if you just want a financial safety net for the foreseeable future. Exactly how much equity do you need to qualify for one, though? Here’s what you need to know. 

Check your borrowing power with Refi.com.

What Is Home Equity?

Home equity is the difference between your home’s appraised value and the mortgage balances against the property. Essentially, it’s the portion of the home you actually own. 

When you pay down your mortgage, you reduce your balances and increase your equity in the home. You also gain equity every time your home increases in value.

As a homeowner, equity can be a valuable thing. It means more profits when you’re ready to sell, and you can leverage it using products like HELOCs, home equity loans, and cash-out refinances.

Generally speaking, the more equity you have in your house, the more you can borrow and the safer lenders view loaning money to you. Here’s another way to view it: if you fall on hard times and cannot make payments, you could still sell the house, net plenty of proceeds, and repay your loan balance without problem. 

Less equity, on the other hand, makes you riskier and could equate to lower loan amounts, higher interest rates, and less favorable loan terms. 

Standard Equity Requirements for HELOCs

Most lenders want at least 20% equity in your home before you can take out a HELOC, though some allow down to 15%. 

These are just minimums, though, and typically, the more equity you have, the better.

Not only does more equity make qualifying for a HELOC easier, but it may also mean better rates and terms, too. Additionally, it can help protect you against potential declines in local home values. 

For example, if you max out the equity you tap and home values fall, you could find yourself owing more on your home than it’s currently worth, meaning you are underwater on your mortgage.

Check your eligibility for a HELOC today.

Can You Qualify with Less Equity?

Some lenders may let you qualify with less than 15% equity in your home — sometimes even just 5% to 10%. Typically, though, you’ll need other financial factors that reduce your risk as a borrower — like a very low debt-to-income ratio, an excellent credit score, lots of money in savings, or a particularly high income.

The exact amount of equity you need (and other qualifications you must meet) varies widely based on the lender you choose, so shopping around is critical if you’re worried about qualifying. 

How Lenders Determine Borrowing Limits

When determining how much you can borrow with a HELOC, lenders consider two different stats. The first is your loan-to-value ratio (LTV), which is how much your home’s value your main mortgage balance makes up.

The second is your combined loan-to-value ratio (CLTV), which is the maximum amount of your home’s value your home equity lender will allow you to tap, minus your other mortgage balances. 

Most lenders allow CLTVs between 80% and 85% of your home’s value. So, for a $300,000 home with a $150,000 mortgage balance, you could likely borrow between $90,000 and $105,000. We dive more into these calculations below.

How to Calculate Your Home Equity

Determining how much equity you have is the first step to getting a HELOC. To calculate yours, you just need two numbers — your home’s current appraised value and the balance remaining on your main mortgage. Then, follow this equation: 

APPRAISED VALUE – MORTGAGE BALANCE = EQUITY

To determine how much you can potentially borrow from that equity, you need the estimated CLTV your lender allows (usually a max of 85%), your home value, and your mortgage balance. Then, calculate your potential loan amount like this: 

APPRAISED VALUE x MAX CLTV – MORTGAGE BALANCE = POTENTIAL LOAN AMOUNT

In the example above, that would be $300,000 x 0.85 = $255,000. Then, $255,000 – $150,000 = $105,000. 

Get started to see if you pre-qualify for a HELOC here. 

Other HELOC Eligibility Factors

Your equity level is only one thing lenders consider when reviewing your HELOC application. 

They also consider credit score, DTI, mortgage payment history, income, employment, and other financial details.

Generally, you must meet the following qualifications:

• Credit Score: Typically 620+, higher scores equate to better rates and terms
• Debt-to-Income Ratio (DTI): 43% or lower, in most cases  
• Income: Stable income and employment history
• Payment History: A history of on-time payments on your current mortgage

Note: Refi.com has a minimum credit score of 620. 

You usually need to supply documents like tax returns, pay stubs, bank account statements, and some form of employment verification when applying for a HELOC, so be sure to have these on hand when filling out your application.

Tips to Increase Your Home Equity 

If you’re worried you don’t have enough equity for a HELOC — or you just want to add an extra buffer to receive better terms or protect yourself against potentially falling home values — there are several ways to increase your equity.

You can:

• Pay down your mortgage principal more: Putting a large chunk of money toward your mortgage balance can increase your equity instantly. Windfalls, like tax refunds, holiday bonuses, or large commission checks, can help here.
• Consider home improvements that increase your home’s appraised value: Talk to a real estate agent about what amenities would add value to your home in your local housing market. When you increase your home’s value, this automatically increases your equity stake.
• Wait for market appreciation: As long as the housing market is strong in your area, your home’s value should appreciate gradually over time, meaning more equity for you.
• Refinance your existing mortgage: If you can refinance your mortgage into a lower rate, it will reduce your monthly payment and free up cash flow to put more toward your principal balance (which increases your equity). You could also refinance the loan and add a lump-sum payment at the same time. This also reduces your balance and improves your equity stake. Some people call this a cash-in refinance.

If you’re not sure you qualify for a HELOC or just want to explore all the ways you can tap your home’s equity, connect with a Refi.com loan expert today to help guide you toward the right move for your financial needs.