If you have a HELOC and believe the value of your home has increased substantially since your line of credit was established, how difficult is it to get your lender to increase your borrowing limit? Here’s what you’ll want to know.
Your home equity line of credit will not automatically increase if the value of your home increases. To access that added value, you’ll likely have three options, depending on your lender:
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Ask your current lender to increase your line of credit. Called a loan modification, it will likely require a new application process, similar to the one you went through when getting your HELOC. You will probably also pay for the appraisal of a new home. However, a lender may be able to cut out some of the paperwork if you have a long history of on-time payments. Not all lenders will offer loan modifications for HELOCs.
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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.)
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Refinance your HELOC. With a HELOC refinance, you’ll apply for a new, larger line of credit and a new draw period with your current lender or a new one. Please note that you will be required to pay closing costs, including a new appraisal. Your current lender may waive some or all of the application fees or closing costs, but it’s always helpful to compare several HELOC lenders to find the best deals and interest rates.
In any of the above scenarios, one of the first steps will be to verify the market value of the home.
“If people have a line of credit and they want to get more equity, the first thing you have to do is show value behind it,” said Karri Noble, senior vice president of home equity operations at CreditDepot. “Therefore, an AVM (automated valuation model) or appraisal should support the higher value.”
The automated valuation models are similar to Zillow’s Zestimate. Using just your address, the technology provides an instant assessment of your home’s likely market value. Needless to say, results vary.
There is one more hurdle to overcome when expanding your HELOC loan limit: your combined loan-to-value ratio.
The CLTV ratio compares the amount you owe on your existing primary mortgage (plus what you are applying to borrow and any 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 accessed with a second mortgage. Some go up to 95%.
Here is an example:
Your house has a commercial value of 400,000 dollars.
you have a first mortgage with a balance of $280,000.
you have a second mortgage, a $40,000 HELOC, or home equity loan.
Your mortgages total $320,000 (280,000 + 40,0000 = 320,000).
Now, we divide the total loan balances by the value of the home:
320,000 / 400,000 = 0.80
you have a combined loan-to-value (CLTV) of 80%.
How much can you borrow with a HELOC?
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A higher home equity credit limit can give you more financial flexibility. For example, you may want to pay off high-interest credit card debt.
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HELOCs typically have lower interest rates than other consumer debt, such as unsecured loans or credit cards.
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The interest on a HELOC may be tax deductible.
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You may have to pay a new round of fees and closing costs.
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Interest Rate Risk: An adjustable rate HELOC can increase, increasing your payments and possibly making them unaffordable.
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Pay more interest: Extra debt means accumulating interest.
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There may be a risk that the value of your home will decline, putting you in negative equity, meaning you owe more than your home is worth.
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Unlike credit card debt, your home is pledged as collateral for a line of credit or home equity loan and you will be at risk of foreclosure if you don’t meet your obligations.
Increasing the credit limit on a HELOC is very doable, although not automatic, and like most financial decisions, it requires a little time and consideration.
Laura Grace Tarpley Edited this article.