If what you owe on your home is less than the remaining balance you have on your mortgage, you’ve got equity. And that’s good news! Because that means you can make your equity work for you. So how much equity is enough to make a home equity line of credit (HELOC) a good financial decision?
First you have to consider your debt-to-income ratio (DTI). This calculation will let lenders evaluation whether you’re able to borrow, considering your other debts and obligations. Finding your debt-to-income ratio is pretty simple. Add all your monthly debts – mortgage, loans, credit cards, child support – then divide by your gross monthly income. Convert that number to a percentage. Every HELOC lender is different, but most recommend a DTI of under 45%.
If your DTI is higher than the percentage listed above, your first course of action is getting rid of extra debt. When it comes to qualifying for a HELOC, the lower DTI you have the better. You can make a shift in your DTI more quickly by making more money, lowering your debt or a combination of the two. Get a part time job. Start a side hustle. And curtail all unnecessary spending so you can put that money toward your debt.
So How Much Equity is Enough?
Now let’s talk about the topic at hand – home equity. Home equity is the value of your interest in your home. It’s your property’s real market value, minus what you still owe on your loan. This number fluctuates – because property values aren’t fixed. Over time as you make your mortgage payments and property values inch up, you’ll have more equity in your home. Most HELOC lenders require at least 10 percent equity in your home before you can quality.
To determine the equity you have in your home (especially if you’ve owned it for several years), you need an appraisal. This will give you – and potential lenders – an understanding of what your home is worth in today’s market and will determine what you can borrow with a home equity line of credit. In many cases, you can borrow up to 90% of your home’s appraised value, minus what you own on your mortgage. Those with very high credit scores and a very low debt-to-income ratio may qualify for borrowing up to 95% of their home’s appraised value!
In short, the more positive cash flow you have, the less equity you need to have to make a HELOC work for you.
Make Your Entire Income Work for You
A HELOC is a powerful financial tool that can help you create a financial safety net for your family. Using the equity in your home is a great way to pay off your home sooner. At that point, you should have the financial freedom to finance home improvement projects, allocate money for educational expenses, and even retire earlier.
Ready for a HELOC? For more information, download our free informational eBook, or begin your HELOC Adventure Experience here.