When you own a home, there never seems to be an end to the number of exciting projects you can start. Whether you’re improving your property or taking a loan for some other purpose, a home equity loan can help you achieve your goals. While there’s no limit to the number of loans you can take against the equity in your home, you will be limited on the total amount. If you think you’ll need multiple loans, a home equity line of credit may be a better option.
TL;DR (Too Long; Didn't Read)
There’s no timeline on taking a second home equity loan, as long as you have enough equity remaining in the home to borrow against. However, you’ll still have to be approved.
Home Equity Loan Terms
The key to approval for a home equity loan is having enough equity in your home to make it happen. So you’ll always be limited by the amount of equity you have in the home. If you took a loan on the maximum amount allowed, you’ll probably find you have to wait a while for your property to appreciate to qualify for another loan.
To lock in current home equity loan rates, though, you’ll need to still qualify for the second loan, just as you did the first. This means having a strong credit score and a low debt-to-income ratio. You may find getting a home equity line of credit or approaching separate lenders for the second loan is easier than getting approval from your original lender for yet another loan.
Risks to Borrowers
If you’re trying to take advantage of home equity loan rates by loading up on loans while you can, it’s important to first know the risks. These loans on your equity will have to be repaid, which is why your lender will evaluate your probability of making on-time payments before approving you. But you also need to take a serious look at your ability to repay before proceeding.
Falling behind on other bills can be dangerous for your credit score, but missing home equity loan payments can have much more disastrous consequences. You could lose your home if you stop paying. If your home value drops, you can also find yourself owing more on your home than what it’s worth, which is an undesirable situation.
Risks to Lenders
Lenders have concerns about multiple home equity loans. Part of that is the fear that you may end up defaulting on one or more of your loans and forcing your home into foreclosure. But you’ll also find that they’re concerned about loan priorities. If you default, the second home equity loan will get in line behind your initial mortgage and the first home equity loan, making it third to be repaid.
Before applying, you’ll need to check your lender’s home equity loan terms. Chances are, there’s a cap on how much you can borrow, regardless of the amount of equity you have in your home. That means you may have to reach out to a separate lender for a loan against the remaining balance. If you do go that route, though, you’ll need to make sure you let the second lender know upfront you have an outstanding loan against part of the equity in your home.
HELOC and Home Equity Loan
One option, if your lender is reluctant to issue a second loan against your equity, is to apply for a home equity line of credit. With a HELOC, you get a flexible line of credit you can borrow against as you need it. So, if you take a line of credit of $10,000, you’d simply tap into it when you need $500 or $5,000 to pay the contractor doing work on your home.
The reason your lender may be more receptive to this option is that it’s less risky than issuing two loans of a large, fixed sum. But they are very different loans on your end, as well. HELOCs typically have an adjustable rate during the initial draw period, while your home equity loan will have a fixed rate. If interest rates rise after you start tapping into your line of credit, you may find you’re paying more than you expected in interest.
Calculating Your Equity
As you’re checking your home equity loan terms, you may recall that you needed a fixed amount of equity in your home before you can qualify for a loan against it. You determine your equity by subtracting what you owe from its current value. This is called loan-to-value ratio, which gives lenders a percentage to determine whether you’re approved.
When you took your first loan, it was against the equity you had at the time. If it’s been less than a year, unless the real estate market has dramatically changed, your equity will likely be similar. The best way to determine whether the value has changed in order to calculate your current equity will be to have a professional property appraisal to get the exact value.
Limits on Borrowing
Even if you qualify for a second home equity loan, you’ll be limited by a percentage of your home’s equity. Typically, lenders will only let you borrow 75 to 90 percent of your equity, in total, with your specific limit based on factors like your creditworthiness and debt-to-income ratio. That means if you have $100,000 in equity, you can expect to borrow $90,000 at most.
But if you’ve already taken a $90,000 loan, and your home hasn’t appreciated in value, you can expect to be denied. If home equity loan rates have dropped since you took out your first loan, that means you won’t be able to take advantage of that. However, if your loan was for less than that full amount, you may still have equity you can borrow against.
How HELOCs Work
If you choose the home equity line of credit option for your second loan, it’s important to know how they work. There are two phases to a HELOC: an interest-only phase, during which you pay interest only, and a repayment period, during which you repay the initial loan balance along with interest. During the interest-only phase, known as the draw period, you’ll usually have an adjustable-rate loan, switching to a fixed-rate loan once you reach the end of the draw period.
The draw period can last anywhere from 5 to 10 years, depending on the terms of your particular loan. During this time, you should be able to also pay on the principal of your loan without penalty. If you’re paying on that all along, you’ll work to reduce the amount you’ll owe once you reach the repayment period.
Home Equity Loan Pros
Although home equity loans can boost your debt, there are times when it’s the best loan option, even if you take more than one. If you weigh the interest you’d pay and find a second home equity loan can save you money in the long run, it might be a wise idea. For example, often homeowners will use home equity loans to consolidate high-interest credit cards.
One of the most popular reasons to take a home equity loan or HELOC is to pay for home renovations. This is especially true if making those improvements will boost the value of your home. If you’re taking a loan to pay for ongoing small renovations or repairs, though, a HELOC may make more sense, allowing you to withdraw money as you need it.
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.