A home equity loan makes sense if:
- You’re happy with your current first mortgage rate and want to leave the balance alone
- You want a fixed-rate loan with a stable monthly payment
- You have specific renovations you want to do and a set timeline for completing them
- You’re paying off high-interest-rate revolving debt
- You’re covering higher education costs
- You’re buying a rental property
- You’re expanding or starting a business
- You’re avoiding mortgage insurance with a piggyback loan
Home equity loan requirements
Guidelines for home equity loans will vary from lender to lender, but you’ll typically need to meet the following general requirements to qualify:
43% maximum DTI ratio. Lenders divide your total debt by your pre-tax income to calculate your debt-to-income (DTI) ratio, and the standard home equity guideline maximum DTI ratio is 43%.
620 minimum credit score. Although lenders may set the bottom score limit at 620, they may set more strict guidelines on your DTI or LTV ratio.
80% maximum LTV ratio. According to the FDIC, many home equity lenders set the maximum LTV ratio at 80%. However, some specialty home equity loan lenders will set higher LTV ratio limits.
Owner occupancy. Some home equity lenders allow you to borrow on a second home or investment property but at much lower LTV limits than a primary residence. You’ll get the best rates and highest LTV ratios if the home equity loan is secured by a home you’re living in.
Closing costs. You’ll typically spend between 2% and 5% of your home equity loan amount on closing costs. Some banks and credit unions may offer special discounts if you open a checking or savings account and have your payment debited directly from your account.