Equity is your home’s value minus any loan balances against it, and it’s a requirement for taking out certain financial products, like home equity loans, cash-out refinances, and, in the case of this article, home equity lines of credit—or HELOCs.
Exactly how much equity you need for a HELOC will depend on your lender’s requirements, but generally speaking, you’ll need at least a 10% to 20% equity stake to qualify.
In this guide:
- How does a lender calculate how much equity I have?
- Can I borrow the full amount of my equity?
- How do I build more equity to meet the lender’s requirements?
- Are there other requirements to take out a HELOC?
How does a lender calculate how much equity I have?
Lenders typically order an appraisal to confirm your home’s value. This could be a physical appraisal, a drive-by appraisal that combines a curbside evaluation with public records data and recent nearby home sales, or an automated valuation model based on an algorithm.
You may be able to appeal your appraisal, particularly if you have evidence such as recent comparable sales that are higher, for instance. You may also be able to order a second appraisal at your own expense. Your lender has no obligation to honor it, though.
Once the lender has determined your home’s value, they’ll deduct the balance on your mortgage loan or any other loans against the property to determine how much equity you can access.
Can I borrow the full amount of my equity?
You can’t borrow the full amount of equity you have. That’s because HELOCs lend money based on your combined loan-to-value ratio—meaning how much your existing mortgage balance and your new HELOC add up to.
So, if a lender offers a HELOC with a 90% LTV, you could borrow up to 90% of your home’s value—minus the balances on your existing mortgage or any other loans against the property.
Here’s an example: A lender offers a HELOC for up to 90% of your home’s value, which is currently $500,000. You have $300,000 left on your existing mortgage loan. To determine how much you could borrow from the lender, you would:
- Multiply your home’s value ($500,00) by the LTV (90%). This comes out to $450,000.
- Subtract your existing loan balance ($300,000) from the amount you can access ($450,000). This comes out to $150,000.
- In this scenario, you could borrow up to $150,000 with a HELOC.
Additionally, some lenders may have dollar-amount limitations for how much they’ll loan. These can also impact how much you may be able to borrow.
How do I build more equity to meet the lender’s requirements?
If you don’t have enough equity to qualify for a HELOC—or you’re not happy with how much cash you could get based on your current equity stake—there are ways to increase it before applying.
To build equity, you can do one of two things:
- Increase your home’s value. Sometimes, your home’s value increases because the local real estate market heats up. You can also increase its value by making certain value-adding improvements or repairs to the home. These types of improvements are typically why people take out a HELOC to start with. Staging these changes over time and doing the highest value add items first may be most beneficial, even if not the most desired updates. Here’s a good list of improvements you might consider.
- Pay down your mortgage loan. You can increase your monthly payments, switch to biweekly payments, or just make a one-time, lump-sum payment toward the balance. The lower your balance is, the more of the property you actually own—and can tap via a HELOC.
Be careful about paying down your mortgage loan just to take out a HELOC. Many first mortgages have fixed interest rates, while HELOCs have adjustable rates, which means your payment can go up or down. Your main mortgage will be more consistent and likely more affordable than a HELOC.
If this is a strategy you’re considering, you might explore a cash-out refinance instead. This would allow you to keep the fixed rates of a traditional mortgage while also turning some of your home equity into cash.
Are there other requirements to take out a HELOC?
Having home equity is the most basic requirement for a HELOC, but it’s just one of many factors a lender will look at when you apply for one. Lenders also consider things like your debt-to-income ratio and credit score. Check out our guide for more details on the home equity line of credit requirements you may need to meet to qualify.
Are you considering a HELOC? Reach out to a few lenders before applying. How much equity you need for a HELOC can vary from one company to the next, so shopping around can help you find the best fit for your situation and budget.