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Bottom Line Up Front

  • Home equity loans and lines of credit (HELOCs) allow you to tap into your home’s equity for home improvement projects, education expenses and more.
  • You’ll need at least 15–20% home equity to qualify for most HELOCs or home equity loans.
  • Other factors can influence your loan approval, including your credit score, debt-to-income ratio and employment history. 

Time to Read

9 minutes

June 28, 2023

Owning a home has many benefits. Aside from having a place to call your own, one of the biggest benefits of homeownership is the ability to tap into your home’s equity. Home equity is the amount of the home you actually own—the difference between what your house is worth and how much you have left to pay on your mortgage. As you build home equity, you can tap into it as cash for home projects or other expenses via a home equity loan or a home equity line of credit (HELOC).

If you’re interested in securing a HELOC, it’s best to start with a solid understanding of the process. This way, you’ll know how to maximize your chances of approval and learn what pitfalls you need to avoid in order to tap into your home equity successfully.

What Is a Home Equity Loan or HELOC?

What is a Home Equity Loan or HELOC?

What is a home equity loan?

A home equity loan (also called a second mortgage) also involves borrowing against home equity, but it’s different from a HELOC. Instead of providing a revolving line of credit, a home equity loan involves a one-time payout. Home equity loans typically have a fixed interest rate and are repaid over a set term, usually ranging from 5 to 30 years.

What is a home equity line of credit (HELOC)?

A HELOC is a type of loan that lets homeowners borrow against the equity they have built in their property. It's a revolving line of credit, similar to a credit card. Borrowers can withdraw funds as needed, up to a certain limit, during a specified draw period. Typically, this period lasts 5–10 years and is followed by a repayment period. HELOCs usually have variable interest rates.

Both home equity loans and HELOCs can be useful to homeowners for a variety of reasons. Many owners choose to borrow against their home equity to do home improvement projects that increase their home’s value even more. Home equity loans and lines of credit can also be used for other purposes, including education expenses, debt consolidation, investment opportunities or major purchases.

Home equity loans and HELOCs are similar, but they come with different benefits, uses and risks. If you’re not sure which one to choose, think carefully about your current financial situation and the reason you want to tap into home equity.

  • Consider the purpose of the loan. If you need a lump sum of cash for a single expense, a home equity loan might be suitable. If you plan to pay for ongoing expenses or want more flexibility, a HELOC might be better.
  • Think about repayment. HELOCs offer repayment flexibility by allowing you to make interest-only or principal payments during the draw period. Home equity loans have fixed repayment schedules with predictable payment amounts.
  • Compare terms. Home equity loans usually have fixed interest rates that may be lower than other types of loans. HELOCs often use variable rates; this can affect the amount of interest you owe.

Steps to Get a HELOC or Home Equity Loan

Whether you’re interested in applying for a HELOC or a home equity loan, you need to prepare for the approval process. Your financial history, amount of home equity and income can all impact your chances of being approved. It’s also important to understand how to evaluate lenders and find the best offer.

Use these steps to prepare for the process of tapping into your home equity.

1. Evaluate Your Home Equity

To qualify for a home equity loan or HELOC, you’ll need to have built up enough equity in your property. In most cases, lenders expect you to have at least 15–20% equity. The more equity you have, the higher your chances will be of approval and the more money you can potentially borrow.

To calculate your home equity, find your home’s appraised value. Subtract your outstanding mortgage balance from that value. For example, if your home is valued at $300,000 and you owe $240,000 on your mortgage, you have $60,000—or 20%—in home equity.

$300,000 - $240,000 = $60,000

Another way to understand your home equity is to calculate your loan-to-value ratio (LTV). The LTV will help your lender determine whether or not to approve you for a home equity loan or HELOC and how much they’re willing to lend you. To calculate your LTV, divide your current mortgage balance by your home’s appraised value, multiplied by 100. Using the previous example, your LTV would be 80%.

240,000 / 300,000 x 100 = 80%

Different lenders will have different maximum or combined LTVs. This combined LTV takes into account both the amount you have left on your mortgage and your desired loan/HELOC amount. LTV maximums will cap how much lenders are willing to lend you. 

  • For home equity loans, you may find maximum LTVs of 70–100%
  • For HELOCs, you may find maximum LTVs of 70–95%

Before applying for a home equity loan or HELOC, calculate your home equity. If you don’t have 15–20% equity, you’ll want to take steps to increase it before applying.  

  • Pay down your mortgage to reduce the overall amount you owe on your home.
  • Make home improvements to increase the value of your home.
  • Keep an eye on the housing market. Fluctuations in home values could influence your home equity and LTV.

Even after you’ve built up around 20% home equity, you’ll still need to consider your LTV. If your desired loan amount makes your combined LTV too high, you might not be approved. Continue to pay down your mortgage and improve your home—or reduce your loan amount—to lower your LTV and qualify more easily.

2. Check Your Credit Score and Debt-to-Income Ratio

Two other important factors in home equity loan/HELOC eligibility are your credit score and your debt-to-income ratio. These two things can impact whether you’re approved at all, in addition to influencing your interest rate and loan terms. 

Every lender has their own requirements for credit score and DTI. As a baseline, you’ll want:

  • a credit score in the mid-600s or higher
  • a DTI ratio below 50%

Your credit score is a 3-digit number that indicates how likely you are to pay back debt. The score rates your payment history, length of history, credit usage and other factors to determine the risk of lending to you. The higher your credit score, the better.

To check your credit score, look at statements from your credit cards, loans or financial institutions. Keep in mind that every institution calculates credit scores differently, so these numbers may differ slightly. If your credit score is trending below 650, you’ll want to take steps to improve it before applying for a home equity loan or HELOC.

  • Focus on making timely payments on all your credit cards and loans.
  • Pay off as much debt as possible to reduce your overall debt burden.
  • Avoid opening new lines of credit.
  • Check your credit report from one of the 3 major reporting bureaus: Equifax®, Experian® and TransUnion®. You're entitled to one free report from each bureau every 12 months. Look for evidence of fraudulent behavior or errors, in addition to bad credit behavior.

Your debt-to-income (DTI) ratio is the percentage of your monthly income that goes toward paying off debt. Lenders typically want you to have a DTI of 50% or lower to qualify for a home equity loan or HELOC. This ensures you have enough income to pay off the loan as well as your other financial obligations.

To calculate your DTI, add up all your monthly debt payments—your mortgage, student loans, auto loans, etc. Then, calculate your gross monthly income, including your gross salary and other sources of income. Divide your debt by your income, then multiply by 100 to get your DTI percentage. The lower this number is, the better.

For example, let’s say your mortgage, auto payment and credit card debt adds up to $2,000 a month. You earn $7,500 a month. This gives you a DTI of 27%.

If your DTI is too high, you’ll need to take action to reduce your debt and/or increase your income.

  • Pay more than the minimum payment to lower your balance and save money on interest.
  • Use the debt avalanche method to pay off high-interest-rate debt first.
  • Consolidate debt into one low-rate loan to make monthly debt management easier.
  • Find additional sources of income, such as extra shifts or a gig job like food delivery. 

The higher your credit score and the lower your DTI ratio, the better terms you may be eligible for with your home equity loan or HELOC. These two things can help you secure more favorable interest rates, longer repayment terms and higher loan amounts.

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3. Gather the Necessary Documents

When it’s time to apply for a home equity loan or HELOC, you’ll need to fill out paperwork and provide documents to your lender. These documents will prove your income, debt totals, outstanding mortgage and home value. It’s a good idea to gather the following documentation, in case your lender asks for it.

  • Income verification, including W-2s and pay stubs from your current employer
  • Tax returns from the most recent year
  • Bank statements and proof of retirement or pension benefits
  • Mortgage statement that shows your outstanding balance
  • Home appraisal that shows the appraised value of your home
  • Insurance documentation for homeowners and hazard/flood policies

4. Evaluate Lenders and Apply

Before submitting an application for a HELOC or home equity loan, it pays to shop around for the best offer. There are many different types of lenders on the market, including your original mortgage lender, your personal financial intuition and other banks and credit unions. Some lenders only offer home equity loans or HELOCs; others offer both. Each lender will have their own requirements and terms for the loan you want.

Consider these important factors when evaluating lenders and offers:

  • Interest rates, including maximum interest rates for a HELOC
  • Maximum loan amount
  • Minimum withdrawal amounts
  • Length of the HELOC draw term
  • Length of the repayment term 
  • Estimated payment amounts
  • Prepayment penalties
  • Inactivity fees

Ultimately, you’ll want to find a home equity loan or HELOC offer that provides you the amount of cash you need upfront and has a repayment cost and term you can comfortably manage. Consult your monthly budget and long-term financial goals to make sure they align with your estimated repayment strategy.

Once you’ve found a lender that offers suitable terms, fill out an application and await approval!

Understanding Loan Denial

It’s possible that your application for a home equity loan or HELOC will be denied. In most cases, this happens because you don't meet your lender’s minimum requirements for the loan.

Often, HELOC denial is due to factors within your control, such as a low credit score, insufficient home equity or poor debt-to-income ratio. You may also be denied because you have an unstable employment or income history—meaning you haven't made enough money consistently to be considered low-risk. In order to improve your chances of approval, work to improve your financial situation by solidifying stable income, reducing debt, paying off your mortgage and improving your credit score.

There are also things you can do in the short term after being denied a home equity loan. You could try applying through a different financial institution that has less-stringent requirements for their loan products. Keep in mind that applying with a low credit score or high DTI could result in a higher interest rate. 

You may also need to reevaluate the size of your loan or HELOC. If you were denied due to a high LTV, your lender may be willing to offer you less than you initially asked for.

Capitalize on Your Home Equity

It's important for homeowners to carefully consider their financial situation and goals before applying for a HELOC or home equity loan. While both products offer flexibility and accessibility, you need to maintain responsible borrowing and disciplined repayment to protect your home equity and financial stability.

If you’ve built substantial equity in your home, make sure you check your LTV, credit score and DTI ratio to improve your chances of approval. Shop around to find a reputable lender and good loan terms before signing on the dotted line.

Navy Federal Credit Union offers both home equity loans and home equity lines of credit. Learn more about our home equity loan products to determine whether you qualify. Then, apply online and start tapping into your home equity when you need it.

Next Steps Next Steps

  1. Determine whether a HELOC or a home equity loan is a better fit for you. Consider what you’ll use the money for and whether a fixed or variable repayment suits your financial situation. 
  2. Calculate your home equity and loan-to-value ratio to determine whether you’ll be eligible for a HELOC or home equity loan. If your equity falls short, work to pay off your mortgage and improve your home’s value.
  3. Explore Navy Federal’s HELOC and home equity loan products and see whether you qualify. Apply for your loan online and get started on the approval process.


This content is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.