A home equity line of credit (HELOC) can be an easy and inexpensive way to access cash when you need it, such as after a layoff or furlough, or when you need to make home repairs or renovations. If you’ve been regularly making mortgage payments, you’ve probably built up equity—or outright ownership—in your home. A HELOC allows you to tap into that equity to free up cash.
The cash you can get out of your home depends on the amount of equity you have in your home, as well as your lender’s guidelines. A typical HELOC lender will allow you to access 80% of the amount of equity you have in your home but some lenders might go up to 90%, though usually at a higher interest rate.
New American Funding
Minimum credit score
640
620 with a 65% LTV
HELOC Loan Rates
Lower than the national average
Days to close
5 days
640
620 with a 65% LTV
Lower than the national average
5 days
How To Estimate the Equity in Your Home
Equity is the amount of outright ownership you have in your home, so it’s the difference between the value of the home and the amount you still owe on your mortgage. To figure out how much equity you have, start by estimating the current value of your property.
The price you paid for your home is not the same as the current value. Property values are changing all the time, and hopefully your home is an asset that is regularly increasing in value.
“Start by typing your current address into the Google search bar,” says Frank DiMaio, senior vice president and regional sales director at Univest Bank and Trust Co. in Souderton, Pennsylvania. “You’ll get a number of search results from real estate pages such as Zillow and Trulia. Click on your home address on one of these sites, and they’ll give you an estimate of what the home is currently worth.”
If your home hasn’t sold in several years, the online estimate may be outdated. You also might have made changes to your home since you purchased it—like adding a swimming pool, for example—that these sites may not take into consideration.
Consider looking at estimates for neighboring homes that have sold recently to see if your estimate lines up with theirs when compared by the price per square foot. If you know a real estate agent in your area, consider asking him or her how much they think your home would bring if you decided to sell now. An agent who sells regularly in a particular area should be able to give you a basic idea of the value without having to conduct any research.
When you have a ballpark number in mind for your home’s current value, subtract the amount of your current mortgage balance from that number. The difference will be an estimate of your equity.
How Much Can You Borrow Against Your Home’s Equity?
If you decide to move forward with a HELOC, the lender you choose will determine exactly how much you can borrow against your equity. The lender will make that determination by first hiring a professional appraiser to make an assessment of your home’s value. You’ll pay for this appraisal when you close the loan.
The appraiser determines your home’s value by taking into consideration the home’s size, condition, features and recent home sales in your market area. For example, if you purchased your home three years ago for $100 per square foot, but homes are now selling in your area for $200 per square foot, your property value is likely quite a bit higher than when you first moved in. However, if your home hasn’t been updated or maintained to the level of the homes around it, the appraised value likely won’t be as high as that of some of your neighbors.
The algorithms online real estate sites use aren’t able to take these nuances into account, so their estimates are never completely reliable. However, once your lender has a professional appraisal in hand, you’ll know just how much you can borrow.
The lender will subtract the amount you owe on any outstanding mortgages from the appraised value of your home. The difference, called the loan-to-value (LTV) ratio, will establish how much you can borrow with a HELOC.
HELOC Loan Limits
HELOC loan limits vary by lender and depend on how much equity you have. Most lenders will let you borrow up to 80% of your equity, or $80,000 for every $100,000. Some will let you borrow up to 90%. If you don’t have excellent credit, you may not be able to borrow as much.
If you estimate your home’s value at $300,000, and you have a mortgage loan for $200,000, you have $100,000 in equity. If your lender will lend you 80% of your equity, you’ll be able to borrow up to $80,000 with a HELOC.
Related: Best HELOC Lenders
How Is Your Maximum HELOC Amount Determined?
In addition to the guidelines related to your home’s value and how much equity you have, your creditworthiness also affects how much you can borrow. Credit score, interest rate, debt-to-income (DTI) ratio and home equity are all interrelated and affect your maximum HELOC amount.
Credit Score
The credit score you need to get a lender’s best rate can vary, but you can typically get that rate with a score of at least 760. You might be able to qualify with a rate as low as 620, but expect a higher rate.
Interest Rate
A higher rate means a higher monthly payment, and a higher monthly payment means you may not be able to borrow as much. Conversely, a lower rate means a lower monthly payment, which means you may be able to borrow more.
In no case will you be able to borrow more than the maximum the lender allows (usually 80% or 90% of your equity). With a higher interest rate, you may be limited to borrowing only 50% to 70% of your equity.
Debt-to-Income Ratio
Lenders will look at your monthly payments on existing debts like credit cards, student loans, car loans and your first mortgage and compare that total to your monthly income. They want to make sure you can afford the monthly payment on a HELOC even if the variable rate increases. The less debt and the more income you have, the more you may be able to borrow.
Can You Increase Your HELOC Amount?
Most HELOC lenders require that you retain at least 20% equity in your home. However, there are a few lenders that will give you a bigger HELOC—that is, one that bumps your loan-to-value ratio higher.
HELOC Requirements
If you think you have sufficient equity in your home to access the cash you need through a HELOC, the application process is similar to applying for a mortgage. Our guide to HELOCs can help walk you through the process, including:
- How to apply for a HELOC
- Getting the best rate
- The process for repaying your HELOC
During the application process, your lender will request information about your current income, assets and debts, and also check your credit.
After submitting all your paperwork, the lender will let you know if you’ve been approved for a HELOC and if so, will offer you a specific interest rate, which is usually variable based on an index like the prime rate. That means your rate can fluctuate over time. After determining how much you can borrow, it’s important to check that you’re prepared to make the payments before moving forward.
A HELOC is a line of credit that you can draw against as needed, and you’ll be required to make interest payments only during the draw period, typically 10 years. Because you’ll only pay interest—and only on the amount of the available loan you use—your payments likely will be lower than your monthly mortgage payment, which includes both principal and interest.
After the draw period ends, you’ll no longer be able to borrow from your line of credit and you’ll have to make monthly principal and interest payments until you pay off the loan.
HELOC Alternatives
A HELOC could be a great option, but you can also access your home’s equity without one. Your other options for tapping into your home’s equity are:
- Home equity loans. HELOCs and home equity loans are similar in that they allow you to access your home’s equity, but there are also key differences. Rather than a revolving line of credit, a home equity loan gives you a fixed amount of your equity all at once. You’ll also repay the loan on a set schedule, rather than as you access the credit line. One key advantage to that is that home equity loans have fixed interest rates, while HELOCs have variable interest rates, meaning they change over time.
- Cash-out refinances. This type of loan replaces your existing mortgage with a new, larger one. You take the difference between the two as cash to use however you want. You’ll generally need to have 20% equity left after the refinance or you’ll probably have to pay private mortgage insurance. A cash-out refinance typically has lower interest rates than a HELOC or home equity loan, but heftier closing costs.
Frequently Asked Questions (FAQs)
How often can a HELOC interest rate change?
HELOC interest rates can vary over their lifetimes and may change on a near-monthly basis. Rates for HELOCs are based on the “prime rate,” which is what banks and other financial institutions use for creditworthy borrowers taking out loans and lines of credit. The prime rate is, in turn, based on the federal funds rate, which is set by the Federal Reserve.
The Fed meets about eight times a year and may change the fed funds rate at any meeting. In fact, when financial market conditions are particularly volatile, like just before the Covid-19 lockdowns in March 2020, the Fed may make rate changes outside of a regularly scheduled meeting.
All that means that HELOC borrowers need to be prepared for their rates to change at nearly any time while the line of credit is open.
How does a HELOC affect your credit score?
Applying for a HELOC, like applying for any type of credit, causes a small dent in your credit score since lenders are making inquiries about your credit profile. But if you take out a HELOC and make timely payments, you’ll likely make up for that small ding, and perhaps improve your credit score even more.
It’s worth noting that since a HELOC is secured by your home, failure to make timely payments won’t just hurt your credit—it could cost you your home.
What can you use a HELOC for?
You can use the funds from a HELOC for almost anything you want: consolidating or paying down other debt, financing an education, making home improvements, buying a splurge item and more.
What is a good HELOC rate?
HELOC rates can fluctuate as interest rates change, and it’s important to do your research before taking one on. From mid 2021 to mid 2022, for example, the average rate on a 10-year HELOC has gone as high as 5.64%, while the 52-week low is 2.55%.
Keep an eye on average rates, and consult our guide to getting the best HELOC rates.
How long does HELOC approval take?
It can take at least several weeks to get approved for a HELOC. Keep in mind that you need a formal appraisal, as just one of several steps, which can take some time.
