How Is Home Value Determined for a HELOC?

Home equity lines of credit (HELOCs) offer flexibility if you’re planning a home renovation or need to cover another large cost. You can borrow up to your total credit line or much less if you choose. This flexibility makes HELOCs popular among homeowners with sufficient home equity.

But before you can qualify for a HELOC, your lender will first need to understand the current value of your home. Its market value and how much you owe on your mortgage will help determine whether you qualify for a HELOC and how much you can borrow. 

Here’s how your home’s value is determined for a HELOC and how it factors into what you can borrow.

In this guide:

• How home value is determined for a HELOC
• Do you need a specific home value for a HELOC?
• What affects your home value?
• What to do if your home value is lower than you expected
• FAQ

How home value is determined for a HELOC 

After you apply for a HELOC, your lender will order an appraisal, which provides insight into the current market value of your home. This can help lenders protect themselves against borrowers defaulting on their loans. The appraisal process and its cost can vary by lender. 

Some banks and credit unions rely on an automated valuation model (AVM) appraisal, which uses recent sales, current-year tax assessments, and other data to determine your home’s value. A digital appraisal may be free or come with a nominal cost. 

Other lenders may require an in-person exterior appraisal or full appraisal of your home’s interior and exterior, which can cost a few hundred dollars, depending on your home’s size.

If a lender requires a full in-person appraisal, the appraiser will assess your home’s condition. They’ll consider recent upgrades and maintenance, overall market conditions, and whether your home has depreciated or appreciated in value since you bought it.  

Can home value be determined without an appraisal?

Generally, your lender will require an appraisal to determine your home’s value before you can qualify for a HELOC. But lenders might make exceptions to this rule in rare cases. For instance, if you purchased your home a few months ago and are now seeking a HELOC, your lender may be willing to use the value from that appraisal. 

Do you need a specific home value for a HELOC?

Your home’s appraised value will affect whether you qualify for a HELOC, as will your outstanding mortgage balance and the amount you’d like to borrow. Requirements vary, but many lenders require borrowers to have a combined loan-to-value (CLTV) ratio below or 85% to get approved for this type of financing.

Your CLTV represents your remaining mortgage balance and the total line of credit you’re seeking, divided by the appraised value of your home. So let’s say your home is appraised at $350,000, you owe $225,000 on your mortgage, and you’d like a $40,000 HELOC to complete a kitchen renovation. 

In this case, your total CLTV would be around 76%, under the threshold many lenders set:

($225,000 + $40,000) = $265,000

$265,000 / $350,000 = 0.75714

CLTV = 75.714%, or approximately 76%

What affects your home value?

Some factors that affect your home’s value are within your control, and others are outside your control. For instance, if you haven’t maintained your home or property, your home’s value could be lower. Recent upgrades and the quality of the workmanship related to those upgrades can also influence your home’s value. 

Market conditions in your area and your neighborhood also play a role. Of course, you can’t control these factors. So if you’re considering applying for a HELOC and your goal is to increase your home’s value, shift your focus to sprucing up your home and yard. 

Here’s a look at factors that can increase vs. decrease your home value.

Factors that can increase home value	Factors that can decrease home value
Quality upgrades to interior and exterior	Neglecting general home and property maintenance
Replacing windows, siding, roof, or exterior doors	Shoddy workmanship or upgrades that don’t meet building codes
Keeping up with general home and property maintenance	Deteriorating neighborhood conditions
Overall market conditions	Overall market conditions

Our expert’s advice

David Haas

CFP®

You only need to be concerned about increasing your home’s value for an appraisal if your CLTV is close to the lender’s limit. Even then, you might benefit more from paying down the debt on your home rather than paying for improvements just to improve CLTV. On the other hand, if you want to spend money to improve your home, pick maintenance issues first, such as fixing a leaky roof or fixing the gutters. Functional items are more important than aesthetic items.

What to do if your home value is lower than you expected

Our expert’s advice

David Haas

CFP®

An easy way to estimate your home’s value is to check a website such as Zillow or Trulia. But these websites estimate value based on other homes in the neighborhood and the features of your home. So you should check to make sure the website has the features of your home correct, particularly number of bedrooms and bathrooms as well as overall square footage and property size. Then you need to take something off for condition. If your home has three bathrooms, but only one is functional, your house might be worth a lot less than another home with three newly renovated bathrooms.

If your home’s appraised value comes back lower than you expected and your CLTV is over your lender’s threshold, you may not qualify for a HELOC. You can appeal an appraisal if you find errors in the appraisal report or feel your home is undervalued, but the process is complicated. 

Our expert recommends this alternative

David Haas

CFP®

You can look for a construction loan. This is a loan that will base the CLTV on the estimated value after the improvement is completed. For instance, if the loan is to fund adding a bathroom to your house, which will raise the value of your home, a construction loan might be easier to get approved than a HELOC. Keep in mind that construction loans require you to submit your plans with the loan application, and the bank will pay the contractor, not you. Interest rates on construction loans are often a bit higher than first mortgages.

Another option is to wait until the market changes or you’ve paid down your mortgage or improved your home.

You can also explore alternatives if you have a more immediate cost to cover. Options to consider include:

• Emergency savings: It could make sense to dip into your emergency savings if you need to pay for upcoming medical bills or another essential expense.
• Borrow from your 401(k): You may be able to borrow up to half of your 401(k) up to $50,000 from your current employer. You repay the loan using automatic distributions from your paycheck over time, paying interest to yourself. Not all 401(k) plans allow loans, and if you were to leave your employer, the loan is due immediately. If you can’t repay it, then the loan balance becomes a 401(k) distribution subject to taxes and early withdrawal penalties.
• Personal loans: These loans are widely available and can have rlow rates and fast approval timelines. Loan amounts, fees, rates, and borrower criteria vary by lender.
• Credit cards: Consider applying for a 0% introductory APR credit card. These cards provide a grace period, often 12 or 18 months, before the regular APR kicks in. If you can repay your total balance before the introductory period ends, applying for a new card could be a smart strategy.

A word of caution: If you’re leaning toward financing, ensure you can afford another monthly payment. Revisit your budget before moving forward to understand how an additional cost will affect you.

FAQ

How much does an appraisal cost, and who pays for it?

The cost of an appraisal depends on multiple factors, including the size of your property, your lender, and whether they do digital or in-person appraisals. HomeGuide estimates that an average home appraisal costs around $475.

Who chooses the appraiser for HELOC home valuation—the homeowner or the lender?

Lenders choose the appraiser for HELOC home valuation. A homeowner can’t select an appraiser.

Are online home value estimators accurate for HELOC evaluations?

Some lenders use automated valuation model estimates for HELOC appraisals. These are similar to what you’d see with online home value estimators on popular home search websites. Lenders’ criteria for estimating value can vary. Consult with potential lenders about their appraisal processes if you’re interested in a HELOC.  

How often will the lender reassess my home value during the life of my HELOC?

The intervals for reassessing your home value during the life of a HELOC will vary by lender. Lenders are permitted by law to decrease your total credit line in some cases. For instance, if a sharp market decline decreases your home’s value, your lender could freeze or reduce your HELOC.

Can a decline in home value affect my open HELOC?

Yes, a decline in home value could affect an open HELOC. Your lender might reduce your available credit if your home’s value decreases.

Do all lenders use the same criteria to determine home value for a HELOC?

The criteria for determining home value may vary by lender. But in general, your lender will consider location, real estate market performance, and your home’s condition when determining its value. Your lender can offer insight into which factors it considers when calculating a home’s value.