With current home equity line of credit (HELOC) rates averaging between 1.79% and 7.24%, many homeowners that have been considering using HELOC to fund their home renovations are finally taking the plunge. Your lender will set a borrowing limit for an agreed-upon period of time, similar to a credit card. Still, in the case of a home equity loan, the lender will give a lump sum, and the homeowner will make a payment every month until the loan is paid off.
Now too, with more people home, the demand and cost for home renovation supplies are at an all-time high, making a HELOC a prominent option if you are making renovations.
Requirements of HELOC
The main requirement for qualifying for HELOC is having enough equity in the home, which most homeowners will have if they have a mortgage. In addition to equity, the homeowner will have to show proof of income, steady employment, and a good credit score.
For example, if a homeowner paid $350,000 for their home and has paid off $175,000, they would have around $175,000 in equity.
The Pros & Cons of Home Equity Line of Credit for Home Renovations
The amount of equity in a home is based on the home’s value and the amount owed on the home. Regular monthly mortgage payments decrease the amount owed and therefore increase the equity, but the open market can cause the value to either increase or decrease, having an overall effect on your equity.
When a home’s value has increased, there is more equity to finance a renovation if you do it at the right time.
Pros
- Easy to qualify for if there is 20% equity in the home
- HELOC is a line of credit, which means as much or as little can be used and only what it used needs to be paid back
- Interest rates are low
Cons
- HELOC is variable-rate, so the interest that is paid can fluctuate month to month
- You can borrow multiple times from a HELOC, making it easy to take on more debt
- Lenders can charge a monthly fee to keep the HELOC open
- If home values drop drastically, more money could be owed than what the home is worth
Getting the Most from HELOC
HELOCs are great for smaller projects since they are a revolving line of credit. They’re convenient and can be used in small increments, which is beneficial for projects that continue for a number of years. The interest may also be tax-deductible if used for home improvement projects only.
Some tips:
- Make your payments on time
- Be aware of fees
- Use for smaller projects
Ways to Leverage Your Home Equity for Renovations
There are endless ways to leverage your home equity, but some of the most popular improvements include:
- Replacing garage doors
- Replacing flooring throughout a home
- Putting on an addition or updating the floor plan
- Renovating a kitchen or bathroom
- Adding hardscape or landscape
- Installing vinyl fencing
With a home equity line of credit, many homeowners often think it’s only beneficial if you’re planning on selling your home in the near future, but that’s not the case! HELOC can help homeowners fund small renovations projects throughout their forever home as well.