Your home is more than just a place to live, it’s also a valuable financial asset. Over time, as you pay down your mortgage and property values increase, you build equity in your home. This equity can be a powerful tool to help you achieve financial goals.
But, before you make the leap, it's important to evaluate whether you're truly ready. Home equity loans and lines of credit use your home as collateral, so making informed decisions is key to avoiding financial pitfalls.
If you're wondering whether now is the right time, here’s a checklist to help you determine if you’re in a good position to take advantage of your home equity.
1. You Have Owned Your Home for Five Years
The longer you've owned your home, the more equity you've likely built. Most lenders prefer homeowners who have at least five years of ownership, ensuring there's enough equity to borrow against.
2. Your Home’s Value Has Increased
Start by looking on home buying websites such as Zillow.com to see what homes similar to yours are worth in your area. If property values have risen near you, your home equity has likely grown as well.
A recent appraisal or market analysis can confirm whether your home is worth more than what you originally paid.
3. You Have at Least 15-20% Equity
Lenders typically require homeowners to have at least 15-20% equity before approving a loan or line of credit. To determine your home equity, subtract your remaining mortgage balance from your home's current market value. Then, divide that number by your home's value and multiply by 100 to get the percentage.
For example, if your home is worth $300,000 and you owe $225,000, your equity is $75,000, which is 25%. Great! With 25% equity, you're in good shape to qualify for a home equity loan or line of credit.
4. You Have a Strong Credit Score
A higher credit score can help you secure better interest rates and loan terms. If your score is in good standing, you’ll have a better chance of qualifying for favorable lending options.
You can check your credit score for free using websites like AnnualCreditReport.com or freecreditreport.com without affecting your credit. Monitoring your score regularly can help you stay on top of your financial health.
5. You Have a Clear Purpose for the Funds
While qualifying for a home equity loan or line of credit is an option, it's important to consider whether it’s the right choice for your financial goals. Your home equity represents years of investment, so it’s wise to use it thoughtfully rather than on unnecessary expenses.
Having a well-defined purpose such as home improvements, debt consolidation, or a major expense, ensures that using your home equity adds long term financial value.
6. Your Debt-to-Income Ratio is Manageable
Lenders look at your debt-to-income (DTI) ratio to determine if you can handle additional monthly payments. A lower DTI means you’re in a better position to take on new debt without financial strain.
Generally, lenders prefer a DTI of 43% or lower, with the ideal range being under 36% to secure the best loan terms.
7. You Understand the Risks and Your Financial Future
Borrowing against your home means putting it up as collateral. You should be confident in your ability to make payments and understand the terms. Before moving forward with a home equity loan, consider your financial stability. Ask yourself:
- Do I have a stable job and work in a secure industry?
- Is my company financially strong, and is my position secure?
- Am I free from major upcoming life changes, such as marriage, relocation, or expanding my family?
If you answered 'yes' to all of these, you’re in a strong position to move forward. However, if you answered 'no' to more than one, it may be wise to pause and reassess. Home equity can be a powerful tool, but it’s important to ensure your financial future remains stable before taking on new debt. It’s okay to wait until you’re truly ready.
When you're ready, let's get started.
If you check off most or all of these boxes, you may be ready to explore your home equity options. Talk with a financial professional today by stopping in a branch closest to you or visiting our website to ensure it's the right move for your unique situation.