When many homebuyers apply for a mortgage, lenders often suggest combining a line of credit with the mortgage. This confuses many homeowners – why after all, would a lender offer to let you borrow more money than you ask to? There are a few reasons the lender will give for doing this; but there are even more why you shouldn’t.

 

Lenders will tell you that combining a line of credit and mortgage is a good idea because it will save you on fees later on, should you ever decide to apply for a line of credit. They’ll also tell you that it will help with unforeseen costs, especially those associated with moving into a new home, and it will give you access to all of your money faster. And while there are fees attached to setting up a line of credit after you get your mortgage, they’ll be well worth what you’ll save in stress, headache, and debt in the future.

 

Generally when a lender offers to combine a line of credit and a mortgage, they’ll ask that you put a large amount of collateral on the loan – as much as 125% of the value of the home. In order to even be approved, you’ll need to have an appraisal done (something that will also cost money) and you’ll also need to make sure that your home value increases before you have access to that credit. And, if you fall into financial stress before that happens, you may not be able to get credit from any other lenders either.

 

This is because after applying for additional credit from another lender, they’re going to look at your borrowing history and current debt situation; and they’ll see that you’ve put up a large amount of collateral on your mortgage and line of credit. Because of that, most lenders won’t want to take on the risk and won’t allow you to borrow more.

 

One of the biggest disadvantages that comes with combining a line of credit and mortgage is that you generally can’t transfer your mortgage to another lender. This is often a condition written into the original mortgage contract but even if it’s not, other lenders may not want to take on the mortgage.

 

Many lenders will have many reasons why combining a line of credit with a mortgage is a good idea. However in truth, it typically only puts more of the power into the lender’s hands and leaves the homeowner with very little wiggle room.