If you have a home equity line of credit (HELOC), don’t expect your credit line to increase automatically along with your home value.
As home values have increased in recent months, homeowners have become wealthier. The average house is worth nearly 21% more than it was a year ago, lifting home equity to record highs nationwide. But to access any new equity, you need to apply for home equity products like a home equity loan or a HELOC, even if you already have one.
- Lenders won’t automatically add to your credit limit if your home rises in value.
- To tap into more of your home equity, you need to ask the lender to modify your existing home equity loan or apply for a new home equity line of credit (HELOC).
- Lenders generally won’t let you increase your credit limit until a certain amount of time has passed since you last took out a HELOC.
- When you making an adjustment to your HELOC, you will likely pay extra fees.
If My Home Appreciates in Value, Does My HELOC Limit Automatically Increase?
A HELOC uses your home as collateral to provide you with a revolving line of credit.
If you have a HELOC, you may wonder whether a higher home value automatically gives you a larger line of credit, but HELOCs don’t work that way. To increase your line of credit, you would have to modify the terms of your current HELOC. You have to ask for this because lenders are generally not willing to extend you a larger line of credit automatically.
If your home depreciates in value, however, a HELOC lender may automatically amend the amount of credit it extends to reduce your line of credit. Lenders can “freeze or reduce your line of credit if the value of the home declines significantly below the appraised amount,” according to the Federal Trade Commission (FTC).
How to Adjust Your HELOC Limit
Two benefits of using a HELOC are that you don’t need to draw all of the money available to you, and that you only pay interest on the amount that you borrow. Keep in mind that lenders will likely charge you more for higher HELOC limits.
If you already have an existing HELOC, you have two main choices if you want to increase your lending limit: Modify your loan or refinance into a new HELOC with a higher limit. Let’s look at each option in more detail.
For a loan modification, contact your lender first about your options for changing the terms. In some cases, you may just need to submit some additional information to get an increase to your line of credit. Your lender will review your creditworthiness, including factors like your credit score and income, along with the current market value of your home.
Lenders usually limit how often borrowers can increase their loan. Bank of America, for example, requires that the account be open for at least nine months, and the borrower cannot receive a credit increase more than once a year or twice in five years.
If you can’t modify an existing agreement, or if you prefer to shop around for a loan from another lender, you can apply for new line of credit. You can use a new line of credit in two ways:
- You can refinance your outstanding balance into a new, larger HELOC with different terms and conditions, as well as a different repayment deadline.
- You can take out a new HELOC in addition to your original HELOC and carry two lines of credit.
Weigh the Pros and Cons
Securing a larger line of credit can provide you with cash to pay for major expenses like a renovation or your child’s college education. But it has downsides to ponder as well. For example, you’re likely to face fees, a higher interest rate, and the risks that come with a loss of equity. Let’s look at each downside in more detail.
Before amending a loan, calculate the cost of fees. The new or amended loan might include charges, such as application fees and closing costs. Some lenders charge an origination fee that is either a flat fee or a percentage of the amount that you want to borrow.
Less attractive rates
When you get an increased line of credit, either by modifying an existing HELOC or refinancing into a new one, the terms generally will be different. In some cases, they may not be better. For example, a larger credit limit or a different interest rate environment could result in an increase to your HELOC’s interest rate.
When you maximize the use of your home equity, you run the risk that if home values decline, your loans could go underwater. This means that you would owe more on the home than it is worth. If that happens, you won’t be able to sell or refinance your home unless you can pay for the loss out of pocket.
What increases equity in your home?
Your home can gain equity, or the difference between your home’s value and what you owe, in two ways. First, you can pay down your mortgage and decrease the principal that you owe. Second, your home can gain equity when its value increases.
How long does a home equity line of credit (HELOC) last?
Home equity line of credit (HELOC) terms can vary depending on the lender. Many lenders offer a 10-year draw period, or the time when you can use the line of credit before the repayment period starts.
Can I open a HELOC and not use it?
You can open a HELOC and not use it. You can access as much or as little as of your line of credit as you like. You will only pay interest on what you actually withdraw. Keep in mind that opening a HELOC often entails fees.
The Bottom Line
If you want to turn your home’s extra value into a bigger line of credit, you will need to either modify your existing HELOC or refinance it into a new, larger one. However, weigh the pros and cons of opening new credit carefully. A new line of credit may offer terms not as good as your current agreement, and the costs to change it could be too high to justify having access to a bit more cash.