5 Reasons the HELOC Loan Is the Best Tool to Finance Home Improvements or Construction

Americans who own homes are flush with equity in 2018. It is estimated they have three times as much equity as they did at the bottom of the market six years ago, per a report from Black Knight, a real estate and mortgage data analytics company.

For many homeowners, this is a good chance to perform some much-needed home renovations. Annual growth in remodeling of homes has been rising since 2016. In Q2 of 2018, spending for home improvements rose 7% to $324 billion, per a report from the Joint Center for Housing Studies at Harvard University.

A research analyst at the center said that much home remodeling happens soon after the house is purchased. But in 2018, homeowners are tapping more equity and they are spending more of it on home renovations.

As values of homes rise, more homeowners will have the capital in their property to pay for their home improvement projects with a home equity line of credit or HELOC. Home equity through a HELOC can be a good way to finance your renovations, if you do it properly.

Why Use a HELOC?

A HELOC is useful because you are given a line of credit that you can use as much or as little as you prefer at any one time.

This is helpful with home projects because the total cost of the project is not clear until the renovation is done. This means you only need to draw on the line of credit as you need it from the HELOC. Thus, you only pay interest on the amount you draw out. For example, if you are approved for a $100,000 HELOC, but only use $50,000, you only pay interest on what you are using.

Another good reason to use a HELOC is your monthly payments are smaller than a personal loan or a cash out refinance. Borrowers only need to pay interest payments during the 10 year draw period. For homeowners wanting to make big renovations without having to make big payments at the start, a HELOC is a good choice.

A HELOC has an edge over a personal loan because the rate is a lot lower. A HELOC these days with decent credit can be obtained in the 6% range, depending upon how much you pull out. The interest rate on a personal loan can be 25% or higher.

Most HELOCs are locked to the prime rate, which currently is around 5%, so this can be a great, inexpensive tool to make renovations on your home.

Cash out refinances have lower rates, but you lose your current first mortgage rate. You may not want to do this as 30 year fixed rate mortgages are now around 4.8%.

Another benefit of using a HELOC for home improvements is the interest is tax deductible, but only if it is being used for home improvements.

Making High Impact Home Improvements with a HELOC

If you use a HELOC to pay for your renovations, you may want to consider doing improvements that bring you a big bang for your buck. If you put too much money into your master bath, you may not be able to get that money back.

However, replacing the front door is usually a high return investment. You can recoup almost 100% of the cost. Lighting also is important. Putting in spot lights in the ceiling that brighten living spaces do not cost a lot and add a lot of value.

Never forget that fresh paint and new carpet are cheap upgrades and they will give the home a fresh, move in ready feel.

Adding more bedrooms and updating the kitchen are effective ways to boost the value of the home.

HELOC Details

Most HELOCs are ARM loans, and the rate will change over time, but you might find a fixed rate HELOC. For an ARM, the loan will probably have a fixed rate during the draw period, but it will adjust when the draw period ends. If yours has a temporary fixed rate that will end when the draw period ends, it is smart to pay down principal on the HELOC as soon as your can, so you can avoid higher interest payments later.

A HELOC is an excellent, inexpensive, low interest way to do your home renovation projects, and are perfect for those projects where you don't have an exact idea what the final product will cost.

References:

https://www.bankrate.com/mortgages/home-equity/home-equity-for-improvement-renovation/