QUIZ: Is a HELOC a Good Idea for Me?

Your burning question: Should I get a home equity line of credit (HELOC)? You’re in the right place. We’ll help you decide in this five-question quiz, covering everything from HELOC rules to loan amounts. Ready? Let’s get started.

1. How much equity do you have?

A. 20% or more

B. 15 – 20%

C. Less than 15%

A HELOC is a revolving credit line based on the equity you have in your home. (To back up further, your equity is how much of your home you actually own: current value minus what is still owed.)  Every lender has their own home equity line of credit requirements. Many require borrowers to have at least 20 percent equity, although some will go as low as 15 percent.

Your equity is typically viewed through a lens called the loan-to-value (LTV) ratio – basically your current mortgage principal divided by the appraised property value and converted to a percentage. An LTV of 80 percent or higher is favorable for a HELOC.

If you answered:

• A. You’re in good shape to be approved for a HELOC. Depending on your credit history and other factors, you may even qualify for the best introductory rate available.
• B. You’re on the right track. You’ll likely meet some lender requirements, but your line of credit may be smaller and interest rate higher than with a lower LTV.
• C. Don’t be discouraged. You may not be eligible just yet, but every monthly mortgage payment will help you gain traction. In the meantime, learn more about how much equity you need for a HELOC.

2. How much money do you want to access?

A. Between $25,000 and $500,000

B. Between $10,000 and $25,000

C. Less than $10,000 or more than $500,000

Your HELOC loan amount will depend on many factors. Your current equity, income, credit score, property type, current debts, and whether or not you live in the home make a difference in eligibility and loan size.

If you meet the qualifications, many lenders allow you to access up to 80 percent of the equity in your home. But the final line of credit also takes into account your outstanding mortgage balance. 

If you answered:

• A. Great, you’re within a typical HELOC range for many lenders. Just remember how much HELOC you can get will be based on your individual factors. 
• B. It may take some extra shopping around, but lower limit HELOCs are available with some lenders.
• C. Don’t rule out a HELOC yet, but your lender may be able to offer alternative solutions that can better serve your needs.

3. How will you use the funds?

A. To make value-adding upgrades to my property

B. For things unrelated to my home, such as managing debt, investing, or paying for unexpected expenses

C. I haven’t thought much about it yet

One of the benefits of a HELOC is that there are no restrictions on what you can or can’t use the funds for. Home improvements are a popular and often worthwhile use, but paying off debt, funding college, investing in real estate, and creating an emergency fund are just some of the other options.

Remember, there are pros and cons of any loan type. A disadvantage of a home equity line of credit is that your home is used as collateral (although that helps secure the low introductory interest rate). Because your house is on the line, it’s recommended to use your line of credit in a way that will put you ahead financially.

If you answered: 

• A. Great news: This is often viewed as the best use of home equity, and your interest payments may even be tax deductible. Consult a tax adviser for further information regarding the deductibility of interest and charges.
• B. Good work identifying your need(s). Be sure to weigh HELOC pros and cons to ensure your equity is put to good use.
• C. Don’t worry, we’ve got you covered. Explore 10 ways to use the equity in your home to your advantage.

4. How are your debt payments going?

A. About 40% or less of my monthly income goes to loan and credit card payments.

B. About 40% – 50% of my monthly income goes toward paying off debt.

C. Debt payments make up more than half of my monthly budget.

Besides helping with your credit score, lowering debt affects another important element in a lender’s mind: your debt-to-income ratio. Also called DTI, this ratio helps lenders better understand your ability to afford HELOC payments based on how much of your income is already used for paying off debt. The max DTI for a HELOC varies by lender, but is typically between 43 percent and 50 percent.

To calculate DTI, add up your monthly expenses from loans and credit cards, including your mortgage payment. Then divide by your pre-tax income.

If you answered:

• A. You may be in a good DTI range to qualify for a HELOC.
• B. With a mid to high DTI ratio, you may be eligible with certain lenders, or you could get your current loan balances down before you apply for a HELOC. A lower DTI may help increase your line of credit or lower your introductory rate.
• C. Lenders look at how much you owe as an indicator of a borrower’s readiness to take on a second mortgage. A higher income or less debt will help you qualify.

5. How long do you plan to own your current home?

A. 30 or more years

B. 11 – 29 years

C. 10 years or less

We know: It’s hard to predict exactly what your future holds. But another factor in your decision is whether you plan to sell the property with a HELOC in the not-too-distant future. Selling requires paying back what you owe, cutting into your home sale profits. The longer you have to build equity and pay back the line of credit, the better you’ll be when it comes time to sell.

If you answered:

• A. Perfect. Typical HELOC terms have a 10-year draw period and 20-year repayment period, so your loan should be out of your hair before it comes time to sell.
• B. A HELOC can still make sense if you plan to sell during the repayment period. Just be prepared to pay the remainder back at the time of sale.
• C. Bear in mind you may still be in your draw period with interest-only payments. Consider paying more than required from the very beginning to put you in the best position. 

Results

So: Is getting a HELOC a good idea? If you answered mostly:

A – You’ve probably put a lot of thought into it already and are in a favorable position to obtain a line of credit for your desired needs. 

B – You may be ready, or you may need a little more time to decide if a HELOC is right for you. If you need help, contact a loan officer to talk through the details of your situation. 

C – You may still be exploring your options, and that’s a great place to start. Visit our Mortgage Knowledge Center for more resources.