You’ve had your home for some time or recently purchased it at a steep discount. Either way, you’ve built up a significant amount of home equity and used a home equity line of credit (HELOC) to convert some of it into cash. But you’re wondering if you can take out a second HELOC to pull out untapped equity.
Read on to learn more about second HELOCs, how they work and where to get the best deal on this home equity loan product.
What is Considered a Second HELOC?
A HELOC is a flexible line of credit that acts as a second mortgage and uses your current home as collateral. You can convert up to 85 percent of your home equity into a pool of cash accessible on an as-needed basis. It operates like a credit card – you can make payments to free up the funds for repeated use.
Most HELOCs come with a draw period of up to 10 years. You’re permitted to make withdrawals during this time frame and make interest-only payments on the amount you borrow. Once the draw period ends, you’ll make principal and interest payments, which will likely fluctuate since the interest rate on HELOCs is typically variable.
If you currently have a HELOC and take out another one, it’s referred to as a second HELOC.
HELOC vs. Second Mortgage: Is a HELOC a Second Mortgage?
A HELOC is a type of second mortgage. HELOCs and home equity loans both let homeowners borrow money against the equity they have built in their homes. These financial products do not change the rate and term of your current mortgage. Your current mortgage and any HELOCs or home equity loans use your home as collateral.
HELOCs have more generous payment plans in the beginning due to the draw periods. However, you will have to make monthly payments right away with a home equity loan. You also get charged interest immediately on a loan, while you only have to pay interest if you borrow money against the revolving line of credit.
How Many Home Equity Lines of Credit Can You Have?
Technically, there is no limit to how many HELOCs you can have. However, you must have enough equity in your properties to take out more HELOCs. If you have two properties with less than 10% equity, you won’t be able to get an additional HELOC. However, if you have 10 rental properties that are fully paid off, you can take out HELOCs for each of those properties.
Is It Possible to Get 2 HELOCs on The Same Property?
There’s no legal limit on the number of HELOCs you can have on a single property. If you meet the lender’s eligibility criteria and have a sufficient amount of equity in your home, you’re permitted to take out two or more HELOCs. Generally, lenders will allow you to tap into up to 80-85 percent of your home equity using this product. Some lenders let you tap into up to 90% of your home equity.
Potential Advantages of Multiple HELOCs
Having multiple HELOCs gives you extra capital that you can use for any expense. Real estate investors use HELOCs to scale their real estate portfolios and generate more cash flow. You can also take out a HELOC to raise enough money for a vacation.
HELCOs also let you access home equity without changing the terms of your current mortgage. You don’t want to give up a low interest rate on your current mortgage through a refinance. That’s where HELOCs come into play and can help you preserve ideal terms.
HELOCs also have lower interest rates than most financial products like credit cards, personal loans, and unsecured lines of credit. Lenders view HELOCs as less risky since the property becomes the collateral.
Potential Complications of Multiple HELOCs
While multiple HELOCs give you more capital, you have to repay the debt over time. Using up your HELOC funds quickly can put you in a tight situation when the draw period concludes. Once the remaining balance converts into a loan, you will have to keep up with payments to keep your house. Your house is collateral, and a lender can claim possession of your property if you do not keep up with your HELOCs and your current mortgage.
HELOCs also have variable interest rates, which creates less predictability. If interest rates increase, you will suddenly have a higher monthly payment. Your balance will also grow faster if rates go up.
There’s also a chance that the way you use your HELOC doesn’t turn out as planned. Some real estate investors take out HELOCs only to end up with unprofitable properties. While leverage is a great thing when everything works well, it can turn into a disaster if you face some of the big challenges in real estate, such as squatters, lawsuits, and local laws that push landlords into a corner.
HELOCs have their perks, but ignoring these noteworthy disadvantages can lead to a less-informed decision. It is important to know the pros and cons before using this financial product or taking out multiple lines of credit against your home.
Do You Need to Use the Same Lender for the Second HELOC?
No, you’re not obligated to use the same lender to get a second HELOC on your property. However, it’s worthwhile to shop around with multiple lenders, including online lenders, traditional banks and credit unions, to find the best deal.
Can You Pay for a HELOC using another HELOC?
Yes, you’re allowed to use one HELOC to pay for another one if the lender doesn’t place restrictions on how the funds can be used.
Things You Need to Consider When Getting 2 HELOCs on The Same Property
Your Credit Score
Ideally, you should have a credit score of 620 or higher to take out a second HELOC. Be mindful that the most competitive loan terms and lowest HELOC rates are generally reserved for borrowers with higher credit scores and a reasonable debt-to-income ratio. So it’s worth improving your credit health before applying if it’s not up to par.
The Amount of Equity on Your Property
Most lenders want you to have at least 15 percent equity in your home. If your home equity is significantly higher, you’ll likely qualify for a more generous HELOC.
Your LTV
As mentioned above, the loan-to-value limit on most HELOCs is 85 percent. This means you must preserve 15 percent of your home’s equity. However, some lenders with no LTV ratio limitations allow borrowers to cash out 100 percent of their home’s value minus the outstanding balance on their existing mortgage.
The Interest Rate on a Second Mortgage
A second HELOC means an added expense to your monthly budget. So, it’s vital to ensure the interest rate on your second mortgage is as low as you can possibly qualify for to keep borrowing costs down.
The Total Value of the 2 HELOCs
It’s equally important to run the number or compute the total monthly payments for the two HELOCs. They should fit comfortably into your spending plan and leave wiggle room for fluctuations that will likely happen in the future since they come with a variable rate.
Conclusion: Is a 2nd HELOC Right for You?
A second HELOC will give you extra funds that you can use for any reason. You can use these funds to reduce financial stress, go on a vacation, buy a second property, or for any other purpose.
These financial products have strengths and weaknesses. Using the funds in a productive manner and taking actions to ensure you won’t become reliable on HELOCs to fund various costs can help in the long run. If a HELOC enables bad money habits, it can hurt your finances over time.
A second HELOC can be a good idea if you have the income to keep up with monthly payments and trim your balance over time. Make sure you can keep up with your current mortgage while taking out lines of credit against your home.
