Do you want to improve your property without the high interest rates of credit cards or personal loans? You may be able to use your home equity! A way to easily get access to this credit is with a Home Equity Line of Credit (HELOC). They have low-interest rates and can be used over a long period of time, similar to credit cards. If you’re ready to renovate your home without the huge upfront cost, this blog is for you!

What Is a Home Equity Line of Credit (HELOC)?

First, we’ll quickly define home equity. It’s your home’s total value minus the amount owed. So if your home is worth $400,000 and you have $370,000 left on your mortgage loan, you have home equity of $30,000.

HELOCs are a great choice for ongoing projects that require a series of multiple payments over time. Like credit cards, the lender approves you to borrow a certain amount based on your home equity, and you can pull out of it whenever necessary. Your funds will come with a “draw period,” which is a set timeframe in which you can use your funds. During this time, you can take as much or as little as you’d like for your home improvement projects. Also, you only pay interest on the money you use at this time. After this, you enter the “repayment period,” where you have to start paying back the entire loan. Some lenders allow you to pay it back over time, while others require you to pay it back all at once.

Things to Consider

The first thing you’ll need to consider is how much equity you have in your home. For most lenders, you’ll need to have at least 20% equity in your property to get approved. You should have a low debt-to-income ratio and a good credit score. While requirements vary between lenders, having a good credit score and equity will make it much easier to get approved.

Disclaimer: We want to mention that your home is used as collateral with a home equity line of credit. If you don’t pay off your loan, it puts your property at risk of foreclosure.

Pros of a HELOC

  • They are flexible and easily accessible, allowing you to draw out as much or as little as you’d like over a long period
  • They’re relatively easy to get approved for, assuming the homeowner has good credit and at least 20% home equity
  • Home equity line of credits have low interest rates compared to other options such as personal loans or credit cards
  • The interest paid on HELOC is usually tax-deductible. If the funds go towards improving the property that secures the loan, you may be able to write off the interest on your annual tax returns
  • They have minimal initial payments

Cons of a HELOC

  • They typically have variable interest rates, making payments more difficult to predict
  • Some lenders require payment in full once the draw period is over. Doing a fair amount of renovations during your draw period could result in a considerable future payment
  • Your home is collateral for the loan, putting you at risk of foreclosure if you don’t pay off the loan
  • The majority of lenders charge an annual fee to keep the line of credit open, even if you’re not using it

Our Advice

We recommend using your funds only as needed and making additional payments on top of the required interest payment during the draw period. By overpaying during the draw period, you can avoid getting hit with a significant charge later on. Spend some time shopping around for different lenders to find one that offers fixed rates instead of variable ones. Fixed interest rates make it easier to estimate and budget for your costs, so you don’t run into any surprises down the road. If you have any questions about HELOC lenders or our other financing options, we’re happy to help out! You can reach us by phone at (855) 405-2426 or on our website by clicking here.

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Call us at (855) 405-2426.