Your New Home Has Grown in Value. Should You Get a HELOC?

Home prices surged to record heights over the past year, leaving some new homeowners in an enviable spot — suddenly sitting on a lot of equity, just a few months or years after purchasing their homes.

Equity is the current value of your home, minus what you owe. It’s one of your most important tools for building wealth, but unlike your cash in the bank, this facet of your wealth is tied up in an asset.

One way homeowners can tap into that wealth is by getting a home equity line of credit, or HELOC. This second mortgage unlocks some of the equity in your home, letting you borrow as needed.

How soon can a new homeowner get a HELOC? And when is it a good idea?

You could qualify within your first year in the home

Many lenders, such as Citizens Bank, have a six-month waiting period before you can apply for a HELOC. But Adam Boyd, head of home equity lending at Citizens Bank, says that the current booming environment has the bank “evaluating whether that policy still makes sense.” Shop around with at least three different lenders and ask how soon after a home purchase you can qualify.

In any case, you’ll have to meet additional requirements:

• 15% equity, but preferably 20% or more. To calculate this figure, find the current value of your home. Divide your remaining mortgage balance by the home’s current value, and subtract this number from one. For example, if your home is worth $400,000 and your mortgage balance is $300,000, you’ve got 25% equity (or $100,000) in the home.

• A debt-to-income ratio below 43%. This number is the total of all of your regular monthly payments — such as your car payment, student loans and credit card minimums — divided by your gross monthly income.

• A credit score over 620. Borrowers with scores of 700 or higher are more likely to qualify for the best rates.

You may need to get a reappraisal of the home. If you originally bought your home with less than 20% down, you’re probably paying private mortgage insurance. If the new appraisal finds that your equity stake now exceeds 20%, you can ask your servicer to end these payments. Even if you don’t get a HELOC, eliminating this monthly expense is advantageous.