Most lenders want you to have at least 15 to 20 percent equity in your home before they will open a HELOC

Home equity is the difference between what your home is worth and what you still owe on your mortgage. If your home is worth $300,000 and you owe $240,000, you have $60,000 in equity. Most lenders will let you borrow against 80 to 85 percent of your total equity, though some go higher or lower depending on your credit score and income.

The 15 to 20 percent minimum means that if you have a $300,000 home, you would need to owe no more than about $240,000 to $255,000 on your mortgage. In practice, this means you usually need to have owned your home for several years or put down a substantial down payment when you bought it. Lenders set this floor partly to protect themselves — they want cushion in case your home value drops — and partly because the paperwork and underwriting cost them money, so they do not bother with very small lines of credit.

Key Takeaways

  • Most HELOC lenders require you to have at least 15 to 20 percent equity in your home, which usually means owing no more than 80 to 85 percent of what the home is worth.
  • Your lender will order an appraisal to find out what your home is currently worth, so the equity calculation is based on today's market value, not your purchase price.
  • Even if you have enough equity, lenders will also check your credit score, income, and debt-to-income ratio before deciding whether to open a line of credit.
  • Some lenders have lower equity requirements if you have excellent credit or a strong income, while others may require more equity if your credit is fair or your income is variable.

How lenders calculate the equity you have

Your lender will order a professional appraisal of your home to find out what it is worth right now. This is not the same as your purchase price or your property tax assessment — it is what the home would sell for in the current market. The appraiser will look at recent sales of similar homes in your area, the condition of your home, and any major upgrades or problems.

Once the lender knows the appraised value, they subtract what you still owe on your mortgage. That number is your equity. If the appraisal comes in lower than you expected, your available equity shrinks. If it comes in higher, you may have more borrowing power than you thought. This is why HELOC offers can change from year to year — your home's value moves, and so does your equity.

Why lenders set a minimum equity requirement

The 15 to 20 percent floor exists for two reasons. First, it protects the lender. If you default on the HELOC, the lender has to foreclose and sell your home to recover their money. If you have very little equity, a drop in home prices could leave the lender with less than they are owed. The equity cushion makes sure the lender gets paid even if the market softens.

Second, it protects you from yourself. A HELOC is a line of credit secured by your home, which means if you cannot pay it back, you can lose your house. Lenders do not want to hand out large lines of credit to people who have almost no skin in the game — the risk of default is too high. By requiring you to have real equity at stake, lenders make sure you have a strong reason to keep paying.

What happens if you have less equity than the minimum

If you have less than 15 percent equity, most mainstream lenders will turn you down. Some credit unions or portfolio lenders (banks that keep their loans instead of selling them) may go lower, but they are the exception, and their rates are usually higher. You might also find lenders willing to work with you if you have an excellent credit score or a very high income, because those factors offset the equity risk in their eyes.

If you are close to the minimum but not quite there, you have a few options. You can wait and let your mortgage balance drop as you make payments — every payment builds more equity. You can make a large lump-sum payment toward your principal to jump over the threshold faster. Or you can shop around; different lenders have different standards, and one may be willing to work with you even if others say no.

How much of your equity you can actually borrow

Having equity and being able to borrow it are two different things. Most lenders will let you borrow up to 80 to 85 percent of your home's appraised value, minus what you still owe on your first mortgage. If your home is worth $300,000 and you owe $200,000, you have $100,000 in equity. At 80 percent, you could borrow up to $40,000 (the difference between $240,000 and $200,000). At 85 percent, you might borrow up to $55,000.

Some lenders go as high as 90 percent, which means you could borrow more, but this is rarer and usually comes with a higher interest rate. The percentage a lender will go to depends on your credit score, your income, your debt-to-income ratio, and how stable your employment is. A borrower with a 750 credit score and steady income might get 85 percent, while a borrower with a 650 score might only get 75 percent.

Other factors lenders check besides equity

Equity is just the starting point. Lenders also pull your credit report and look at your credit score. Most want to see a score of at least 620, though many prefer 680 or higher. They will also look at your payment history — if you have missed payments on your mortgage or other debts, that is a red flag.

Your income matters too. Lenders want to know that you can afford the HELOC payment on top of your existing mortgage and other debts. They calculate your debt-to-income ratio by adding up all your monthly debt payments and dividing by your gross monthly income. Most lenders want this ratio to be 43 percent or lower, though some will go higher if your credit is strong. If you are self-employed or your income varies, lenders may ask for two years of tax returns to see an average.

What to do if you are not sure how much equity you have

You can get a rough estimate by looking at your mortgage statement (which shows what you owe) and checking your local property tax assessor's website or a real estate site like Zillow or Redfin (which shows estimated home values). Subtract the first number from the second, and you have a ballpark figure. Keep in mind that these estimates are not official — a lender's appraisal will be the real number.

If you want a more precise answer before you talk to a lender, you can order a home appraisal yourself, though this costs money (usually $300 to $500) and the lender may order their own anyway. A faster and cheaper option is to call a few HELOC lenders and ask what they would estimate your equity to be based on your address and mortgage balance. Many will give you a rough number over the phone without any obligation.

Frequently Asked Questions

Can I get a HELOC if I have less than 15 percent equity?

Most mainstream lenders will not open a HELOC with less than 15 percent equity, but some credit unions or smaller banks may. Expect to pay a higher interest rate and possibly a larger origination fee. Your best bet is to call lenders directly and ask what their minimum is — it varies.

Does my equity amount affect the interest rate I get?

Not directly, but it affects whether you get approved at all and how much you can borrow. Interest rates are set mainly by the current market, your credit score, and the lender's risk assessment. Two borrowers with the same credit score might get the same rate even if one has 30 percent equity and the other has 50 percent.

What if my home value drops after I open a HELOC?

Your existing HELOC will not be cancelled, but the lender may freeze your line or reduce your credit limit if your home loses significant value. If you have not drawn the full amount yet, you might not be able to borrow the rest. Your payment obligation on what you have already borrowed stays the same.

How long does it take to build enough equity for a HELOC?

It depends on your down payment and how fast your home appreciates. If you put down 20 percent, you already have the equity you need. If you put down 5 percent, it could take several years of mortgage payments plus some home value growth. You can also speed it up by making extra principal payments on your mortgage.

Can I use a HELOC right after I buy my home?

Only if you put down at least 15 to 20 percent. Most first-time buyers put down less, so they have to wait. Even if you have the equity, lenders often want to see at least six months of on-time mortgage payments before they will open a HELOC, because they want proof that you can handle the debt.