How much equity do you need for a HELOC?

Woman at a laptop asking herself – how much equity do I need for a HELOC?

Please note: Discover® Home Loans offers a home equity loan product but does not offer HELOCs.

The amount of equity you need for a home equity line of credit (HELOC) depends on the lender, the specific loan terms, and other factors.

A HELOC allows borrowers to use their home equity as collateral, like a home equity loan. A HELOC works similarly to a credit card — once approved for the line of credit, you can borrow funds up to pre-determined limit and use them for whatever purpose you deem necessary. People may use a HELOC if they need access to cash to make home improvements, pay off debt, or cover unexpected expenses.

Equity requirements for a HELOC are more nuanced than a solid percentage, with lenders taking many things into account.

What to know about home equity for a HELOC

Loan-to-value (LTV) ratio is a formula lenders may use to determine eligibility for a HELOC. It’s calculated by dividing the borrower’s current mortgage balance and proposed loan amount by the appraised value of their property.
When applying for a HELOC, a lender will usually request an appraisal to determine the value of your property.
Although Discover Home Loans doesn’t offer HELOCs, you may be eligible to borrow between $35,000 and $300,000 with a home equity loan.

What is home equity?

Home equity is the difference between what your house is worth in the current market and how much you owe on your mortgage. If your property increases in value, your equity may grow. Making mortgage payments may also increase equity by reducing the amount you owe.

Some people capitalize on their equity by taking out a HELOC or home equity loan.

How much equity do I need for a HELOC?

When applying for a HELOC, a lender may require an appraisal of your home to determine its current value. The lender may also use a formula to work out whether you are eligible for a HELOC. LTV ratio is one of the most common formulas. 

LTV ratio is the borrower’s loan amount divided by the appraised value of their property. For example, if you have a $100,000 mortgage, and your home is appraised at $200,000, your LTV ratio would be 50%.

The lower the LTV ratio, typically the less risk a loan is to a lender.

Lenders generally approve HELOCs based on a specific LTV ratio and other factors.
Every lender has different requirements, so it's always best to check with multiple lenders before applying for a HELOC.

HELOC vs home equity loan

HELOCs and home equity loans are both ways to borrow against the value of your home, but there are some critical differences between the two. With a home equity loan, you borrow a lump sum of money and usually make fixed monthly payments over a set period.

HELOCs work differently — you're approved for a line of credit with a pre-determined limit that you can draw upon as needed during an initial draw period. You usually only pay interest on the amount of money you pull during your draw period, so you may have more flexibility in terms of when and how you make payments.

After the draw period, you normally enter a repayment period, where you pay interest and the loan principal.

Home equity loans typically have lower interest rates than new consumer loans. That may make them a good choice for major expenses like home repairs or renovations.

How to qualify for a HELOC or home equity loan

Qualifying for a HELOC or home equity loan doesn’t have to be challenging. By understanding the basics of how these loans work, knowing what you need to qualify, and having enough equity, you may be able to secure the funds you need.

Credit score

Your credit score may play a vital role in your eligibility for a HELOC or home equity loan. A higher credit score means you are more likely to get credit.

Generally, people with higher credit scores receive lower interest rates than people with lower credit scores. If your credit score isn't where it needs to be, start by checking your credit report and ensuring all your debt payments are up to date.

Income

Lenders want to make sure you can afford loan payments, so they usually look at your income. This may include income from sources such as investments, rental property, and retirement funds.

When determining your eligibility for a HELOC or home equity loan, lenders may ask you to provide verifiable documents, such as W2s or paycheck stubs.

Debt-to-income (DTI) ratio

DTI ratio refers to how much of your income goes toward paying off existing debt each month (including your current mortgage).

Lenders like a low DTI ratio because it usually means a borrower is more likely to manage their monthly debt payments successfully.

A DTI ratio that exceeds 43%, may prevent you from getting a loan.

For example, if your income is $3,000 per month, and your monthly debt liabilities are $2,000 per month, your DTI ratio would be 67% ($2,000 divided by $3,000). This DTI ratio may put you at risk of being declined for a HELOC or home equity loan.

LTV ratio 

Your LTV ratio may affect the types of loans available to you. Generally, the lower your LTV, the more favorable loan terms you may be able to qualify for.

Check current HELOC and home equity loan rates

If you're interested in a HELOC or home equity loan, start by evaluating how much equity you have available. Then, consider your credit score, income, DTI, and LTV to determine your eligibility. Lastly, remember to check current rates before selecting a loan. 

Once you're ready, you can get started on your application!

Although Discover Home Loans doesn’t offer HELOCs, you may be eligible to borrow between $35,000 and $300,000 with a home equity loan. Review the requirements for a home equity loan to find out more.

Main: The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover Bank or its affiliates.