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Home equity levels have reached incredible highs over the past few years, with homeowners averaging $313,000 of equity currently. The main driver behind that growth? Surging home values have widened the gap between what homeowners owe on their mortgages and what their homes are worth.
Naturally, many homeowners are tapping their equity right now since they have more to draw from — and since rates on these types of borrowing products are lower, on average, than most other types of borrowing currently. While there are a few different home equity lending products to choose from, home equity lines of credit (HELOCs) are a popular option, as these lines of credit allow you to draw from them as needed (up to the credit limit), making them a flexible borrowing option compared to lump-sum loans.
If you’ve already taken out a HELOC and have seen your home equity levels increase further in the time since, you may be wondering if your HELOC credit limit will grow based on that uptick in home equity. Here’s what to know in this case.
Find out what today’s top home equity borrowing rates are now.
Does your HELOC limit grow if your home value rises?
Generally speaking, your HELOC limit won’t grow automatically as your home equity increases. Lenders set your initial HELOC limit based on several factors, including your borrower profile, your home’s appraised value and how much equity you have in your home.
By weighing those factors, your lender sets a HELOC limit they feel aligns with the risk you present as a borrower. That could mean your lender approves you for the HELOC amount you requested or a limit that is higher or lower than you requested. These factors are also why your lender generally won’t automatically adjust your HELOC credit limit if your home value rises. Just because your home value increases doesn’t mean the risk to the lender lessens.
However, just because an automatic HELOC limit increase is typically not offered through your lender doesn’t mean you’re without options if you want a higher line of credit.
Learn more about the HELOC rates you could qualify for here.
How to increase your existing HELOC limit
If you want or need a higher HELOC limit, your two main options are typically to:
Refinance your HELOC
Refinancing your HELOC may allow you to get a higher credit limit. To refinance, you’ll need to go through the full application process, which includes the lender weighing your credit score, income and other factors to determine your borrowing terms.
The upside to refinancing your HELOC is that if you’re in a better financial position and have a stronger borrowing profile than you did when you applied for your first HELOC, you could get a better rate along with a higher credit limit. However, the downside is that refinancing a HELOC comes with new closing costs, which average between 2% to 5% of the total borrowed amount.
Apply for a new HELOC
Your other option for increasing your HELOC limit is to apply for a new line of credit. Taking out a new HELOC could offer you access to more credit if you need it. However, you will have to go through the full application process again, including paying a new set of closing costs — and it’s typically not as easy to get approved for a second HELOC because the risk to the lender is higher since you’re borrowing more money on top of your primary mortgage and first HELOC.
The bottom line
In general, a lender won’t automatically increase your HELOC limit just because your equity level grows. If you find yourself in need of a higher HELOC limit, though, you may still have options. In that case, you can consider either a HELOC refinance or new HELOC to get the extra funding you need. Before you do that, though, take a moment to review your financial situation and make sure you can afford to borrow more from your home’s equity. After all, withdrawing too much from your home equity could lead to serious financial trouble if you’re unable to afford your payments, so it’s important to borrow responsibly — even if the funds are there and accessbile.
