Although it varies by lender, to qualify for a HELOC you’re typically required to meet the following criteria:
How to apply for a HELOC
Before applying for a HELOC, make sure that you’ll be able to qualify for the loan amount you need. Also, confirm it’s the right type of loan for your situation because there are other ways to access your home equity, such as home equity loans or a cash-out refinance. Also make sure you meet the basic requirements of most lenders by having at least 15% to 20% equity in your home, a good credit score and a low combined loan-to-value ratio, or CLTV, which is the ratio of all of your outstanding mortgage balances compared to the market value of your property.
How to determine your LTV ratio
To calculate how much equity you have in your home, look up your outstanding mortgage balance and subtract it from your home’s appraised value.
For example, if your home is currently worth $500,000 and you have $400,000 left to pay on your mortgage, then you have $100,000 of equity in your home.
The next step is to determine your loan-to-value ratio, or LTV ratio, which is your outstanding mortgage balance divided by your home’s current value. (Your combined loan-to-value ratio, or CLTV ratio, is simply the ratio of all outstanding loans secured against your property divided by your home’s current value. Most lenders want to see a CLTV of 85% or lower.) So for a $500,000 home that you owe $400,000 on, the calculation would be:
$400,000 / $500,000 = 0.80
In this example, you would have an 80% LTV ratio. Most lenders will let you borrow in the neighborhood of 75% to 90% of your available home equity, but having a high LTV tells a lender you may be a risky borrower. To determine if you’ll hit that threshold you can use the below formula, which assumes a lender will allow you to borrow up to 85% of your home equity:
$500,000 [current appraised value] X 0.85 [maximum equity percentage you can borrow] – $400,000 [outstanding mortgage balance] = $25,000 [what the lender will let you borrow]
Reach out to lenders
It’s important to interview multiple lenders to find a loan with a favorable interest rate and terms. The more banks and lenders you contact, the better your chances of finding more favorable rates and fees overall. A good place to start can sometimes be the lender or bank that issued your first mortgage, since they’ve already approved you for one loan and you have an existing relationship with that lender. Also compare rates from online lenders.
Send in your application
Once you’ve chosen a lender, it’s time to gather all of your financial documentation to verify you can comfortably pay back the HELOC. You’ll need things like proof of income and employment, and in some cases, you may need to pay for a new home appraisal to verify the current market value of your property, especially since home values have skyrocketed over the past two years. After all of your financial paperwork is submitted, the final step is to close on the loan, which can take anywhere from 30 to 60 days depending on the lender.
Tips for comparing multiple HELOC offers
The offers you receive will vary from lender to lender, but the more you know about the specific ins and outs of those offers, the better your chances of saving money and interest on your home loan. There are a few major factors to consider when deciding which HELOC offer to go with.
Introductory rate period
Since HELOCs have variable interest rates that are tied to the prime rate, your interest rate will go up and down over time. Be aware of what the prime rate is and know that you’ll be paying a markup on that interest rate. In the beginning, however, most HELOCs come with a lower introductory rate period, but the length of those initial rates will differ by lender, and you want to find the longest one possible. The longer you have a lower interest rate, the more money you’ll save over time.
Rate cap
Ask what your maximum HELOC interest rate cap will be. HELOCs have lifetime interest rate caps that they can’t legally exceed — so even if the prime rate rises and surpasses your rate cap, your HELOC rate won’t increase any further. If you have an existing HELOC, you can attempt to negotiate a lower rate with your lender. “Ask your current HELOC lender if they will fix the interest rate on your outstanding balance,” said Greg McBride, chief financial analyst at Bankrate, CNET’s sister site. “Some lenders offer this, many do not. But it is worth asking the question.”
Minimum withdrawals
Some lenders require minimum withdrawals regardless of your total line of credit, which means you could get stuck making interest payments on funds you don’t actually need if that amount is less than the mandatory minimum withdrawal amount set by your lender. It’s also important to make sure you know when your draw period ends so that you can afford the larger principal-plus-interest payments you must start making once you enter your repayment period.
Methodology
We evaluated a range of lenders based on factors such as interest rates, APRs and fees, how long the draw and repayment periods are, and what types and variety of loans are offered. We also took into account factors that impact the user experience such as how easy it is to apply for a loan online and whether physical lender locations exist.
You can use CNET’s mortgage calculator to help you determine how much house you can afford. The CNET mortgage calculator factors in variables like the size of your down payment, home price and interest rate to help you figure out how large of a mortgage you may be able to afford. Using the CNET mortgage calculator can help you understand how much of a difference even a slight increase in rates can make in how much interest you’ll pay over the lifetime of your loan.
