How Soon Can I Get a HELOC After Buying My Home?

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Borrowers commonly ask, “How soon can I get a HELOC after purchasing a house?”

And the answer is simple: You can apply for a home equity line of credit (HELOC) the minute you close on your house purchase, without any legal or regulatory waiting time.

However, there are practical issues that mean many recent homeowners cannot apply that quickly. And in this article, we’ll explore those issues so you’ll know when you can get a HELOC.

In this article (Skip to...)

• How soon can I get a HELOC?
• How long does it take to get a HELOC after applying?
• What is a HELOC?
• What is a home equity loan?
• Pros and cons of tapping home equity

How soon can I get a HELOC or home equity loan?

So, what stops some recent homeowners from getting a HELOC (or its big brother, the home equity loan, aka HELoan) straight after closing? It’s something called the “combined loan-to-value ratio” (CLTV).

People who’ve owned their homes for several years or for decades are rarely affected by this. But those who have more recently become homeowners can find it an unsurmountable obstacle to home equity borrowing.

"The average U.S. homeowner now has more than $274,000 in equity — up significantly from $182,000 before the pandemic." -- Selma Hepp, Chief Economist for CoreLogic, June 2023

“Combined loan-to-value ratio”

HELOCs and HELoans are both forms of second mortgages. And that means they’re secured on your home.

But lenders of mortgages and second mortgages have strict rules about the proportion of a home’s market value that can be secured borrowing.

Often, a HELoan lender requires an 80% CLTV. That means all your borrowing secured by your home — your first (main) mortgage plus any second mortgage(s) — can’t exceed 80% of the home’s market value.

Home equity is the inverse of CLTV. It’s the amount by which your home’s value exceeds your mortgage balance. So, an 80% CLTV means a 20% equity stake. And a 90% CLTV means you have 10% equity.

How do you calculate how much equity you have?

Suppose you’re buying your home now and it’s worth $400,000. And let’s assume you’re making a 20% down payment.

That down payment would be $80,000 ($400,000 x 20% = $80,000). So, your mortgage balance would be $320,000 ($400,000-$80,000 or 20% = $320,000).

So, you’d have 20% equity, which means an 80% CLTV.

Example of how your CLTV might move

Of course, rising home prices would mean your home’s market value increases. And your mortgage payments will (slowly at first) reduce your mortgage balance.

Naturally, those will change your CLTV. Indeed, there are times when it could change daily.

Let’s continue with our earlier example. Suppose home prices increased 20% during your first year of owning the home. The home’s value would increase to $480,000 ($400,000 + 20% = $480,000).

And your mortgage balance would reduce by perhaps $3,750 that year as a result of your monthly payments. Read about amortization to discover why most of your monthly payments in the earlier years of your mortgage go on interest.

So, your CLTV would be calculated based on a home value of $480,000 and a mortgage balance of $316,250. That’s $316,250 ÷ $480,000 = 65.9% CLTV. Looked at another way, your home equity would be 34.1% (65.9% + 34.1% = 100% of your home’s value).

In those circumstances, you could borrow a HELoan or HELOC that would take your CLTV up from 65.9% to the 80% cap. That’s 14.1% of your home’s market value (80% - 65.9% = 14.1%).

We know that the value is $480,000. And 14.1% of that is $67,680, which is the amount you could borrow. ($480,000 x 14.1% = $67,680).

How soon can I get a HELOC? It mostly depends on how quickly home prices are rising

You witnessed home prices rising as a nationwide average at more than 20% a year for a while. But more recently, they’ve been rising much more slowly. For example, according to the Federal Housing Finance Agency house price index, they increased by 3.1% during the year ending April 2023.

Naturally, the slower home prices rise, the longer it will take for you to build equity in your home. And, to answer our original question, “How soon can I get a HELOC?”, that will take longer, too.

It’s not always an 80% CLTV cap

One more thing on this topic. Most HELoan lenders prefer an 80% CLTV. But you might find one that’s a bit more flexible; 85% CLTVs are fairly common.

However, HELOC lenders tend to be easier going. And you might be able to find one of these lines of credit with a CLTV as high as 90%.

How soon can I get a HELOC after applying for one?

The closing process on a HELOC varies widely depending on your lender’s requirements, how busy it is, and the complexity of your case.

You’d be very lucky for it to take less than 15 days but unlucky for it to take much more than 45 days. That’s roughly two-to-six weeks from your making your application to your getting your money.

It’s mostly similar for home equity loans. But it may be rarer to close in 15 days and less unusual to do so in more than 45 days.

What is a HELOC?

Think of a HELOC as the mortgage version of a credit card.

It’s like a card because you’re given a credit limit and can borrow, repay and borrow and repay again as often as you want up to that limit. And you pay interest (mostly at a variable rate) each month only on your then current balance.

However, a HELOC is better than a credit card for a few reasons. Most importantly, its interest rate is likely to be a fraction of a card’s.

And you’re under no obligation to pay back any of your balance until you’re ready to do so. Your minimum payment is purely the interest for that month.

Pick the right time

Another difference from a card is that your HELOC is time limited. You can largely choose how long you want it to last, up to 30 years. But the account will end one day. And you will eventually have to zero the balance.

To make sure you can do that comfortably, HELOCs are divided into two phases. During the first, the “draw period,” you can borrow up to your credit limit at will. But then you enter the repayment period.

And then you can’t borrow any more. Instead, you must repay the loan (including new interest) in equal monthly installments. If that’s an issue at the time, you may be able to refinance your HELOC.

As we said, you largely get to choose how long your draw and repayment periods last. Each commonly exists for five or 10 years, but 15 years isn’t unknown. So, altogether, you could have your HELOC for up to 30 years.

To keep down borrowing costs, you should choose the shortest period that you’re confident you can comfortably manage. But affordability must be your first priority. So take as long as you need.

If you’re wondering if it’s a good idea to get a HELOC, you must have enough equity in your home to meet the lender’s requirements. And you’ll likely need a credit score of 620 or better, an existing debt burden that’s not too onerous, and a steady source of income.

What is a home equity loan?

A HELoan is much easier to get your head around than a HELOC. There are no draw and repayment periods: it’s a straightforward installment loan, typically with a fixed interest rate.

In other words, you get a lump sum on closing. And you repay it in equal monthly installments. So, budgeting for one of these couldn’t be more simple.

They typically have loan terms ranging from 10 to 30 years. You can deduct interest paid on this loan type, but only when using funds to buy or build a property or “substantially improve” a property you already own.

Pros and cons of tapping home equity

Here are some important pros and cons of tapping your home equity:

Pros

1. Home equity products are among the least costly forms of borrowing
2. These are “any-purpose” loans, meaning you can use the money any way you want
3. You may get tax deductions if you use home equity borrowing to improve your home
4. Tapping home equity means you don’t have to refinance your entire mortgage. After recent rate rises, you’ll probably want to leave your main mortgage’s low rate in place
5. Pick the HELoan or HELOC term that you find affordable: usually, from five-to-30 years
6. Choose between the predictable HELoan and the flexible HELOC

Cons

1. HELoans and HELOCs are second mortgages. So, your home is at risk if you fail to keep up payments
2. People with uber-high credit scores may be able to find personal loans with rates that rival home equity products. Grab one if you can (see Con 1). But very few qualify for such low rates

The bottom line

The average American homeowner has $274,000 in equity as of the Q1 2023, according to CoreLogic. Tapping a HELOC or HELoan are among the least costly ways of borrowing.

Most of those average homeowners would see their applications approved because it’s not hard to qualify for a HELOC or HELoan. They could get their money in roughly two-to-six weeks.

However, those who became homeowners in recent years may have to wait to qualify. That’s because they need enough home equity to secure their new borrowing while leaving an equity cushion to protect their existing first mortgage.

If you’re ready to tap your home equity, let us help. We’ll introduce you to lenders that can offer you competitive quotes.