Once you've taken out a mortgage to buy your first home, you will inevitably run into more expenses, be they renovations, repairs or otherwise. When considering your options to finance home renovations, you will need to evaluate what is called a "HELOC," or a home equity line of credit. Banks often offer this financial option to homeowners, and it may be right for you. However, there are strict rules accompanying a HELOC, including dictating whether you can have more than one at a time.
What Is a HELOC?
The team at Rocket Mortgage describes a HELOC as comparable with a credit card, with the spending limit set as a percentage of your home's equity. Once you've paid down your mortgage to a degree, you can leverage that value into a line of credit through one or more lenders. A HELOC is one of the most popular options to finance home renovations.
Most banks have a set ratio of debt to income and equity in the home to the total value of the home. They will use this information, in conjunction with other detailed financial records they'll ask you to provide, to determine whether you are eligible for a HELOC at their institution.
Home Equity Lines of Credit vs. Home Equity Loans
Although both home equity lines of credit and home equity loans are a kind of second mortgage, a home equity loan involves a single instance of borrowing a set amount of money against the value of your home, equal to or less than the amount you have paid off of the original mortgage.
A HELOC, in comparison, has two stages: a "draw" period and a "repayment" period. During the draw period, the amount of equity you've built up in your home acts as your credit limit, allowing you to borrow up to that amount. During the repayment period, you may no longer borrow more money but now begin to pay back the total value borrowed during the draw period.
The Federal Trade Commission explains that most HELOCs will allow you to borrow up to 85 percent of your home's equity, equity here meaning the amount of your home's value you've paid off from your initial mortgage. It's worth noting that you will be making your HELOC payments separately from your mortgage payments, even if you use the same lending institution for both.
HELOCs With Different Lenders
While most lending institutions won't state it outright, you can always look at second or even third-party lenders to take out a home equity line of credit. It is obviously easier to use the same lender with which you have your mortgage, since they already have all of the information on the property's value and your credit rating, possibly even offering a discounted rate or bundle deal with your mortgage. This does not necessarily mean that your mortgage lender will offer you the best annual percentage rate or repayment options, and it is always a good idea to shop around to see what your options are.
While it is possible to have multiple lines of credit on your home at the same time, applying for HELOCs from different lenders at the same time without disclosing it to both lenders is considered mortgage fraud. To viably have two HELOCs at the same time, you would have to have both excellent credit and tremendous equity in your home, effectively owning it outright.
If you don't meet both of those criteria, there are always other options, such as a cash-out refinance, which Caliber Home Loans describes as effectively replacing your existing mortgage with a new one, basically starting your mortgage over entirely.
Consider also: What Is HELOC vs. Home Equity Loan?