Let’s look at how much equity you need to qualify for a home equity loan, how to calculate your own home equity, and how you can increase your home’s equity.
Minimum Equity Requirements for Home Equity Loans
Your home equity represents your ownership interest in the home. It’s the home’s appraised value minus the principal balance remaining on the current mortgage. Therefore, if your home is worth $500,000 and your principal balance is $300,000, your home’s equity would be $200,000. The percentage of equity would be the equity amount ($200,000) divided by the home’s worth ($500,000), which is 40%. Many home equity loans are for people with 20% or more equity in their homes. However, lender requirements vary, so you might qualify with less than 20% equity. Your lender will assess your loan-to-value (LTV) ratio—which is your remaining mortgage balance divided by your home’s appraised value—to determine your equity. For example, an LTV of 80% would mean that you have 20% equity in your home.
How to Calculate Your Loan-to-Value Ratio
Your lender will do an official LTV ratio calculation during the home equity loan application process, but you can gather some information to assess your potential eligibility beforehand.
Find Your Current Principal Balance
Get your most recent mortgage statement and look for the line mentioning the principal balance. This is often shown in the account information section. If you don’t have a statement available, check your lender’s portal to locate the outstanding principal. You could also call the lender and have them check. If your home already has multiple mortgages, you’ll need to add each principal balance together.
Determine Your Home’s Current Appraised Value
The most accurate way to find your home’s appraised value is by getting a professional appraisal done. Your lender will likely require you to arrange one during the application process, but you could also have an appraisal performed beforehand. The appraiser will evaluate your home’s condition and consider the market to get an accurate value. For a rough estimate of your home’s value, you can look at the sale prices of similar homes nearby, use the Federal Housing Finance Agency House Price Calculator, or consult property tax records. If you bought your home relatively recently, you could use the sales price as a baseline, but keep in mind the value may have changed.
Perform the LTV Ratio Calculation
Next, divide your principal balance by your property’s appraised value to calculate your LTV ratio. If your principal balance is $300,000 and your appraised value is $400,000, the calculation would be: $300,000 / $400,000 = 0.75 = 75% Since the loan amount is 75% of this property’s value, you have 25% equity in your home. This exceeds the typical minimum equity requirements, so you’d more likely qualify for a home equity loan.
How to Increase Equity in Your Home
If you fall short of the minimum home equity requirements, or if you don’t have enough equity for the loan amount you want, you have ways to build equity. The best options will depend on how quickly you need to build equity and how much money you can contribute.
Pay More Toward the Principal
If you have the funds, you can build equity by contributing extra money toward your mortgage principal. You’ll need to verify, however, that your specific lender allows extra principal payments. You must also specify this intent when you make the payment. If you’re short of the equity requirements and you need the funds sooner, you could pay a large lump sum toward the principal for faster results. For example, you might use a large work bonus, tax refund, or even a gift from a family member. You could also consider a side job for extra income to put toward your mortgage.
Consider Home Improvements to Add Value
Both internal and external home characteristics affect the market value, so you can consider upgrades to increase home equity. For example, you might remodel your kitchen, get new siding, or add a room. Keep in mind certain home improvements, like those done for accessibility or after a disaster, may not raise the value.
Wait for Appreciation From Market Changes
The national average for home appreciation is 3% annually, but many factors can affect your property value. They include market demand, the location of your home, and its condition. Since home prices generally appreciate, you could simply wait to get a home equity loan if you don’t need the loan immediately. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning! Your allowed loan amount ultimately depends on your lender’s rules as well as factors such as your property value, credit score, and debt-to-income ratio. The lender will consider the combined loan-to-value (CLTV) of your existing mortgage plus the home equity loan to assess affordability.
