If you have a HELOC and believe your home’s value has grown substantially since your line of credit was established, how hard is it to get your lender to raise your borrowing limit? Here’s what you’ll want to know.
Your home equity line of credit will not automatically increase if your home’s value increases. To access that added value, you’ll likely have three options, depending on your lender:
Ask your current lender to increase your credit line. Called a loan modification, it will likely require a new application process, similar to the one you went through when getting your HELOC. You’ll also probably pay for a new home appraisal. However, a lender may trim some of the paperwork if you have a long history of timely repayments. Not all lenders will provide loan modifications for HELOCs.
Get another HELOC from a different lender. If you still owe a balance on your current HELOC, you may want to explore getting a second HELOC from a different lender. The combined loan-to-value (CLTV) ratio of your first and second mortgages will still come into play. (See below for more details on CLTV.)
Refinance your HELOC. With a HELOC refinance, you’ll apply for a new, larger line of credit and a new draw period with your existing lender or a new one. Keep in mind, you will be required to pay closing costs, including a new appraisal. Your existing lender might waive some or all of the application fees or closing costs, but it’s always useful to shop among several HELOC lenders to find the best offers and interest rates.
In any of the scenarios above, one of the first steps will be to verify the home’s market value.
“If people have a line of credit and want to take out more equity, the first thing you have to do is show supporting value,” said Karri Noble, senior vice president of home equity operations for loanDepot. “So, either an AVM (automated valuation model) or an appraisal needs to support the higher value.”
Automated valuation models are similar to Zillow’s Zestimate. Using only your address, the technology provides an instant evaluation of your home’s likely market value. Needless to say, results vary.
There is one more hurdle to clear when expanding your HELOC borrowing limit: your combined loan-to-value ratio.
The CLTV ratio compares the amount you owe on your existing primary mortgage — plus what you are requesting to borrow and all of your home equity loans or lines of credit — to the value of your home. Many lenders will allow up to 80% of your home’s value to be accessible with a second mortgage. Some go as high as 95%.
Here’s an example:
Your home has a market value of $400,000.
You have a first mortgage with a balance of $280,000.
You have a second mortgage, a HELOC, or home equity loan of $40,000.
Your mortgages total $320,000 (280,000 + 40,0000 = 320,000).
Now, we divide the total loan balances by the home value:
320,000 / 400,000 = 0.80
You have a combined loan-to-value (CLTV) of 80%.
How much can you borrow with a HELOC?
A higher home equity credit limit can give you more financial flexibility. For example, you may wish to pay off high-interest credit card debt.
HELOCs usually have lower interest rates than other consumer debt, such as unsecured loans or credit cards.
Interest on a HELOC may be tax deductible.
You might have to pay a new round of fees and closing costs.
Interest rate risk: An adjustable-rate HELOC can rise, increasing your payments and possibly making them unaffordable.
Paying more interest: Additional debt means accumulating interest.
There can be the risk of your home’s value declining, putting you in negative equity, which means owing more than your home is worth.
Unlike credit card debt, your home is pledged as collateral for a home equity line of credit or loan and will be at risk of foreclosure if you default.
Increasing the credit limit on a HELOC is very doable, though not automatic, and like most financial decisions, requires a little time and consideration.
Laura Grace Tarpley edited this article.
