If you have a Home Equity Line of Credit (HELOC) and believe that your home’s value has increased significantly since you established your line of credit, you may be wondering how difficult it is to get your lender to raise your borrowing limit. Here’s what you need to know.
Your HELOC will not automatically increase if your home’s value goes up. To access the added value, you typically have three options, depending on your lender:
1. Ask your current lender to increase your credit line: This process, known as a loan modification, will likely involve a new application, similar to when you first got your HELOC. You may also need to pay for a new home appraisal. Some lenders may streamline the process if you have a good repayment history, but not all lenders offer loan modifications for HELOCs.
2. Get another HELOC from a different lender: If you still have a balance on your current HELOC, you can explore getting a second HELOC from a different lender. The combined loan-to-value (CLTV) ratio of your first and second mortgages will be taken into account.
3. Refinance your HELOC: With a HELOC refinance, you can apply for a new, larger line of credit and a new draw period with your current lender or a new one. You will need to pay closing costs, including a new appraisal. Shopping around for the best offers and interest rates is advisable.
In any of these scenarios, one of the first steps will be to verify your home’s market value. Automated valuation models, similar to Zillow’s Zestimate, can provide an instant evaluation of your home’s likely market value using just your address. However, it’s important to note that results may vary.
Another factor to consider when increasing your HELOC borrowing limit is your combined loan-to-value ratio. This ratio compares the total amount you owe on your existing primary mortgage, any additional borrowing you request, and all home equity loans or lines of credit to your home’s value. Many lenders allow up to 80% of your home’s value to be accessible with a second mortgage, while some may go as high as 95%.
A higher HELOC credit limit can offer more financial flexibility, such as paying off high-interest credit card debt. HELOCs typically have lower interest rates than other consumer debts, and the interest may be tax-deductible.
However, there are also risks to consider when increasing your HELOC limit, such as new fees and closing costs, potential interest rate increases, and the risk of owing more than your home is worth if its value declines. Additionally, defaulting on a HELOC could lead to foreclosure.
Increasing the credit limit on your HELOC is achievable but not automatic. It requires careful consideration and understanding of the potential risks involved. If you’re considering expanding your HELOC borrowing limit, it’s essential to weigh the benefits against the risks and consult with your lender to explore your options.
