If you have a home equity line of credit (HELOC), you may wonder if it’s eligible for a limit increase. It depends on several factors, including the lender’s policies and if you meet the eligibility guidelines for an increase (if applicable). But before inquiring, you should know that raising your HELOC comes with its fair share of pros and cons.
Read on to learn more about HELOC limit increases, the steps involved and alternatives that may be more viable for your financial situation.
What is a Home Equity Line of Credit (HELOC)?
As the name suggests, a home equity line of credit (HELOC) is a type of revolving credit line that lets you borrow against your home equity. It acts as a second mortgage and uses your home as collateral. So, if you fall behind on your payments, the lender could foreclose on your home.
How HELOCs and HELOC Limits Work
A HELOC works like a credit card, as you can borrow, repay, and borrow again up to a set limit. It is usually capped at 85% of your home equity or the amount you own outright. To illustrate, if you owe $245,000 on your home and it’s worth $365,000, you could potentially secure a HELOC of up to $65,250 ($365,000 * .85 – $245,000).
You’re permitted to make withdrawals during what’s referred to as the draw period. But when it ends, repayment commences, and additional withdrawals are prohibited.
These debt products typically come with variable interest rates, so your monthly payments will fluctuate with market conditions. The upside is most lenders require interest-only payments during the draw period to help make the balance more manageable.
Can You Increase Your HELOC Limit?
Yes, you can potentially raise your HELOC limit through one of these methods:
- Refinancing: You can apply for a refinance with a different lender, but this strategy may involve new closing costs.
- Loan modification: Ask your current lender about a loan modification that could adjust your HELOC’s amount, term, or rate in exchange for a fee.
- Paying down principal: Doing so increases the equity you have in your home and could qualify you for a higher HELOC limit.
Pros of Increasing Your HELOC Limit
Here’s a closer look at some key advantages of increasing the limit on your HELOC.
Access to More Funds
A higher limit means you can access more funds when needed. This can be particularly helpful if you need to cover a large expense or consolidate hefty debt balances. Or you can request an increase and use the HELOC as an emergency fund. Doing so can give you peace of mind, knowing you have a safety net that is easily accessible if a financial emergency arises.
Potential Tax Benefits
The interest paid on a HELOC may be tax-deductible if used for home improvements that substantially increase the property’s value. So, an increase gives you more wiggle room in your home renovation budget and could help you save big at tax time. Be sure to consult with a reputable tax professional to learn more.
Flexibility in the Use of Funds
Remember, there are no spending restrictions on HELOCs.You can use the additional funds for a variety of purposes beyond just home improvements, such as consolidating high-interest debt or funding major life events. And the flexibility to draw funds as needed and only pay interest on what you borrow makes HELOCs far more versatile than traditional loans.
Cons of Increasing Your HELOC Limit
There are also downsides to be aware of, as mentioned below.
Possible Higher Interest Rates
You could get a higher interest rate if you’re approved for a HELOC increase. The rate is already variable in most instances, and it could shift upward depending on how big of an increase you secure, potentially making your monthly payments unaffordable.
Increased Monthly Payments
A steeper interest rate means higher monthly payments. You must also consider the impact of a higher credit limit. Since you’ll have access to more funding, you’ll also pay more if you take additional withdrawals.
Risk of Over-Borrowing
You also risk borrowing more than you can comfortably afford to repay. Pulling more cash than you need with a HELOC limit increase can be tempting. And if you fail to resist temptation, you could find yourself with an additional debt balance that’s challenging to manage.
Eligibility Criteria for Increasing Your HELOC Limit
If the benefits outweigh the costs and you decide to move forward, familiarize yourself with the eligibility criteria before formally applying for a HELOC limit increase.
Credit Score Requirements
Some lenders go as low as 620, but 700 or higher makes you more attractive to lenders. Your credit profile should also be free of recent missed payments and high balances (in relation to the credit limit) on revolving debt (i.e., credit cards and other lines of credit).
Income and Employment Status
Lenders want reassurance that you can afford the monthly payments that could come with a larger HELOC limit. In turn, they prefer applicants with a stable employment history and a steady, verifiable source of income.
Your debt-to-income (DTI) ratio, or the percentage of your monthly gross income used to pay debt obligations, should be below 43%. The lower your DTI, the better in the eyes of lenders.
Loan-to-Value Ratio (LTV)
The loan-to-value (LTV) ratio also plays a role in your approval odds. It’s calculated by dividing your outstanding home loan and HELOC balances by your home’s appraised value. Ideally, it should not exceed 80% to have the best chance of securing an increase.
Property Appraisal
The lender will order an appraisal to determine the market value of your home. This figure is used to determine how much equity you have in your home and to compute the LTV ratio referenced above.
Steps to Increase Your HELOC Limit
When you’re ready to apply for a HELOC limit increase, here’s what to do next.
Review Your Current HELOC Terms
Take a look at the loan agreement for your current HELOC and review the terms. Jot down the interest rate, draw period, repayment period and credit limit. Also, read the loan disclosures to determine if the lender charges a fee to modify your HELOC.
Check Your Credit Report and Score
The next step is to check your credit report and score to see where you stand. If your report contains errors, file disputes promptly, as they could be dragging your credit score down. Remember, scores at or above 700 generally qualify for the best terms, so it’s worth improving yours if needed before applying for a limit increase.
Gather Necessary Documentation
You’ll typically need proof of income, such as pay stubs or tax returns, and documents related to your current HELOC to request a limit increase. If you’ve recently had an appraisal done, provide this information as well. Having these documents handy can help expedite the review process.
Contact Your Lender
Reach out to your lender to formally request a credit limit increase, and prepare to send over any documents needed to review your request. Be prepared to negotiate the terms and inquire about any fees or conditions associated with the increase.
If you don’t qualify for a loan modification, you may have to explore refinancing elsewhere. More on this shortly.
Factors Affecting Approval for Increase
Lenders evaluate several factors when considering you for an increase.
Market Conditions
Market conditions can significantly impact your ability to secure a higher HELOC limit. If housing prices in your area are increasing, lenders may be more willing to extend additional credit.
Interest rates also play a role. When rates are low, borrowing costs less, making it easier to justify an increase in your line of credit.
Your Financial Health
Lenders will look at your credit score to assess your reliability in repaying debt. A higher credit score can help boost your approval odds.
Income stability is also important. Lenders will review your income to ensure you can handle the additional debt. They may also look at your debt-to-income ratio to see how much debt you carry compared to your income.
Equity in Your Home
If your home has appreciated in value since you took out the HELOC, you might have more equity to borrow against. Having substantial equity can also improve your chances, as it reduces the lender’s risk. However, less equity usually means a lower chance of approval.
Outstanding Debt
High levels of existing debt can be a red flag, so make sure to pay down as much as you can before applying.
Your current HELOC balance, credit card debt, and other loans are all considered. If your debt levels are high, your debt-to-income ratio increases, which can negatively affect approval chances.
However, reducing outstanding debt before applying for an increase can improve your chances.
Some Alternatives to Increasing Your HELOC Limit
If you aren’t having much luck with your lender, here are other options to consider.
Refinancing Your HELOC
You can potentially refinance your HELOC with a different lender. The process involves replacing your current credit line with a new one, preferably with a higher limit and more favorable terms.
Taking Out a Second HELOC
You could also take out an additional HELOC to access more funds. This approach could be variable if you already have a low rate on your current HELOC and prefer not to modify the terms. Just be sure you can afford to manage a second line of credit.
Considering a Home Equity Loan
A home equity loan is a separate loan that allows you to borrow against the equity you’ve built in your home. Unlike a HELOC, which is a line of credit, a home equity loan provides a lump sum of money.
This option might be preferable if you need a large, one-time amount of cash.
