How Much Home Equity Do You Need for a HELOC?

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Updated: September 19, 2024

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A home equity line of credit (HELOC) is a popular financing option that allows you to borrow against the equity you’ve built in your home. Lenders are more likely to approve your HELOC application if you meet their requirements, such as having at least 15% to 20% home equity.

Understanding how much home equity you need for a HELOC is important because it directly affects your eligibility and borrowing power. Knowing this upfront helps you determine if a HELOC is the right option for your financial needs and ensures a smoother application process.

Key Takeaways

Lenders typically require 15–20% home equity to qualify for a HELOC.

Calculate your home equity by subtracting your mortgage balance from your home's current market value.

Increase your home equity by making extra mortgage payments or investing in value-boosting home improvements.

What Is Home Equity?

When you buy a home, you don’t own it entirely right away. Instead, you build ownership over time as you pay down your mortgage. This ownership is what’s known as home equity — the difference between your home’s current market value and the amount you still owe on your mortgage.

Home equity is a valuable asset because it can be borrowed against if needed or realized as profit when you sell your home. Experian found that as of Q3 2023, the average HELOC balance was $42,139, indicating that home equity can be a significant financial resource.

How to Calculate Home Equity

Lenders typically require you to have at least 15% to 20% equity in your home to qualify for a HELOC. Knowing how to calculate your home equity allows you to better understand your borrowing power. Your equity is the difference between your home's market value and what you still owe on your mortgage. Understanding this helps you determine how much you can borrow with a HELOC.

Imagine you got a $300,000 mortgage and purchased a home five years ago worth $400,000. Over time, you’ve paid down your mortgage, and now you owe $275,000. Meanwhile, your home’s market value has increased to $450,000. Let's use this scenario to calculate your home equity.

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Step 1: Determine Your Home's Current Market Value

Start by finding out what your home is worth today. You can do this by checking recent sales of similar homes in your area, using online valuation tools or getting a professional appraisal. In this scenario, your home's current market value is $450,000.

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Step 2: Find Your Outstanding Mortgage Balance

Next, look at your most recent mortgage statement to see how much you still owe. In our example, you owe $275,000 on your mortgage.

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Step 3: Subtract Your Mortgage Balance from Your Home’s Value

To calculate your home equity, subtract your outstanding mortgage balance from your home's current market value.

Our formula is Home Equity = Market Value - Mortgage Balance

Substituting our figures from Steps 1 and 2, it looks like this: Home Equity = $450,000 - $275,000 = $175,000

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Step 4: Calculate Your Home Equity as a Percentage

To understand how much of your home you own outright and to gauge your eligibility for a HELOC, convert your equity into a percentage of your home's value. Use the formula:

Equity Percentage = (Home Equity)/(Market Value) x 100

Using our figures: Equity Percentage = ($175,000 / 450,000) x 100 = 38.9%

With 38.9% equity, you exceed the typical minimum of 15–20% required for a HELOC, making you a strong candidate for approval.

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WHAT IS USABLE EQUITY?

Even after you calculate your home equity, you can’t borrow the full amount. The portion you can access through a HELOC is known as usable equity. This depends on your lender’s loan-to-value (LTV) ratio product offerings, which is the percentage of your home’s value they’re willing to lend against.

For example, if your home is worth $450,000 and your lender offers an 80% LTV product, they’ll lend up to 80% of your home’s value, or $360,000. If you still owe $275,000 on your mortgage, your usable equity would be $85,000 ($360,000 - $275,000).

HELOC Calculator
Discover borrowing capacity, interest rates, and make informed financial choices with confidence!
You may be eligible for a HELOC. Because you have an LTV at or below 85%, you may be approved for a home equity line of credit.
10 Years Payoff Scenario
$732/mo
Eligible to Borrow
$62,500
Loan-to-Value Ratio
80%
Note: Lenders set varying limits on the acceptable Loan-to-Value (LTV) ratio, depending on the property type (owner-occupied or investment). Typically, owner-occupied homes have a higher acceptable LTV, often capped at 85%.

How to Build Equity

If you don’t have much equity, it can limit how much you can borrow with a HELOC or even affect your eligibility. Fortunately, there are several ways to build equity in your home over time. Let’s explore some of these:

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    Make Extra Mortgage Payments

    Paying more than your monthly mortgage reduces your principal faster, increasing your equity. Even small additional payments can significantly reduce your loan balance over time.

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    Choose a Shorter Loan Term

    Opting for a 15-year mortgage instead of a 30-year one builds equity faster. Higher monthly payments mean more goes toward your principal, shrinking your debt quicker.

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    Invest in Home Improvements

    Home renovations like kitchen upgrades or bathroom remodels can boost your home’s market value, which in turn increases your equity. Focus on projects that add tangible value and have a high return on investment.

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    Refinance to a Lower Interest Rate

    Refinancing your mortgage at a lower interest rate reduces your monthly interest payments, allowing more of each payment to go toward reducing the principal, thus building equity faster.

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    Make a Larger Down Payment

    If you’re purchasing a home, making a larger down payment gives you more equity from the start. This higher equity can be a strong financial foundation for future borrowing.

Pros and Cons of Borrowing Against Home Equity

Borrowing against home equity offers access to substantial funds, often at lower interest rates than other loans. However, it puts your home at risk if you can’t repay. It’s important to weigh these pros and cons carefully before securing a HELOC. Let’s explore these in detail.

Pros
  • Lower Interest Rates: Loans secured by home equity often have lower interest rates than personal loans or credit cards, saving you money over time.
  • Larger Loan Amounts: Borrowing against home equity allows you to access a significant amount of money, which can be used for major expenses like home renovations or consolidating high-interest debt.
  • Potential Tax Benefits: Interest paid on a HELOC may be tax-deductible if used for home improvements, potentially reducing your tax liability.
  • Money for Home Improvements: Investing the funds in home improvements can increase your property’s value, thereby potentially boosting your home equity over time.
Cons
  • Risk of Losing Your Home: Since your home is used as collateral, failure to repay the loan could lead to foreclosure, putting your home at risk.
  • Reduction in Home Equity: Using your home equity reduces the amount of ownership you have in your home, which can impact your financial stability and limit future borrowing.
  • Increasing Debt: Borrowing against your home adds to your overall debt load, which could affect your financial stability and future borrowing options.
  • Market Value Fluctuations: A drop in your home’s market value can reduce your equity, making it harder to sell or refinance without significant loss.

Additional HELOC Requirements

Having at least 15–20% home equity is just one factor lenders consider when assessing your HELOC application. Knowing other HELOC eligibility requirements, like credit score and income stability, can increase your chances of approval. Let’s explore these additional requirements so you’re fully prepared before applying.

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    Credit Score

    Lenders typically require a good to excellent credit score (usually 680 or higher) to approve a HELOC. A higher score demonstrates reliability in repaying debts, making you a more attractive borrower.

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    Debt-to-Income Ratio

    Your debt-to-income (DTI) ratio measures your monthly debt payments against your income. Most lenders prefer a DTI ratio of 43% or lower, indicating you have enough income to manage new debt.

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    Stable Income

    Proof of a steady and sufficient income is essential, as lenders want to ensure you can comfortably make HELOC payments. This usually involves providing recent pay stubs or tax returns.

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    Home Appraisal

    Lenders often require a professional appraisal to determine your home's current market value. This ensures the equity you’re borrowing against is accurately assessed.

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    Employment History

    A consistent employment history — usually at least two years with the same employer — can strengthen your HELOC application by showing financial stability.

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Debt-to-Income Ratio Calculator

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Comparing Home Equity Options

A HELOC might not always be the best choice, especially if you prefer a fixed interest rate or need a lump sum upfront. Fortunately, there are other loan options to consider. Let’s compare HELOCs with other ways to access your home equity.

HELOC Alternative
What It Is
Who Should Consider It

Home Equity Loan

A loan that provides a lump sum of money upfront, with fixed monthly payments and a fixed interest rate.

Homeowners who need a large amount of money at once and prefer predictable, fixed payments.

Cash-Out Refinance

A new mortgage that replaces your existing one, allowing you to borrow more than you owe and take the difference in cash.

Homeowners who want to refinance their mortgage for a better rate while also accessing their equity.

Reverse Mortgage

A loan available to homeowners aged 62 or older, allowing them to convert home equity into cash without monthly payments.

Seniors who need additional income and prefer not to make monthly payments, while staying in their home.

FAQ About Home Equity Requirements for HELOCs

Many homeowners may have questions about how much equity you need for a HELOC. We’ve compiled answers to commonly asked questions to help you better understand the requirements and make informed decisions about your options.

How much equity do I need to qualify for a HELOC?

Most lenders require at least 15–20% home equity to qualify for a HELOC.

How do you calculate home equity for a HELOC?

Subtract your outstanding mortgage balance from your home's current market value. The difference is your home equity.

Can I get a HELOC with less than 20% equity?

It's unlikely, as most lenders require at least 20% equity. However, some may offer exceptions based on other factors like credit score.

What factors affect the amount of equity I can borrow against?

Lenders consider your loan-to-value (LTV) ratio, credit score, income and overall debt when determining how much equity you can borrow against.

How does a HELOC impact my home equity over time?

As you draw from your HELOC, your home equity decreases. Repaying the HELOC replenishes your equity.

What are the risks of borrowing against my home equity?

The main risk is foreclosure if you can’t repay the loan. Additionally, borrowing increases your debt load, which can strain your finances.

Can I increase my home equity to qualify for a larger HELOC?

Yes, paying down your mortgage, making home improvements or waiting for your home’s value to increase can help build more equity.

About Zachary Romeo, CBCA

Zachary Romeo, CBCA headshot

Zachary Romeo is a certified Commercial Banking and Credit Analyst (CBCA), and the Head of Loans and Banking at MoneyGeek. Previously, he led production teams for some of the largest online informational resources in higher education, with over 13 years of experience in editorial production.

Romeo has a bachelor's degree in biological engineering from Cornell University. He geeks out on minimizing personal debt and helping others do the same through people-first content.

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