Does Your HELOC Grow Automatically If Your Home’s Value Increases?

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.

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.

Loan modification

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.

New HELOC

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:

1. You can refinance your outstanding balance into a new, larger HELOC with different terms and conditions, as well as a different repayment deadline.
2. 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.

New fees

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. 

Underwater risk

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.

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.