Understand the benefits of using a HELOC for home renovations
A home equity line of credit, or HELOC, is a great financial tool available for home improvements due to low-interest flexible borrowing, flexible repayment, and potential tax deductions. It can be used for landscaping projects, kitchen remodels, new additions, roofs, HVAC, bathroom remodels, and more.
Learn about the best ways to add value to your home, improve your quality of life, and take advantage of tax breaks with a HELOC.
Key Takeaways
A home equity line of credit, or HELOC, is useful for funding home repairs, renovations and home improvements because of low available interest rates
With a HELOC, you can withdraw only the amount you need to pay for your home projects, saving you thousands in interest over other home equity loans
Under the Tax Cuts and Jobs Act of 2017, interest on home equity lines used to substantially improve your home can be tax deductible
HELOCs offer flexible options for repayment and use of funds, which can make it a better choice than other types of loans or credit cards
Can I use a HELOC for home improvements?
Yes, a HELOC is an ideal way to finance home improvements, renovations, and repairs due to its potential advantages! In fact, a HELOC is one of the best ways to pay for such projects due to the potential for tax breaks and flexibility.
HELOCs have flexible borrowing amounts and repayment options. As mentioned above, you can make cash withdrawals up to the credit limit determined by your lender and only pay interest on the amount of the credit line that is being used. This allows you to only spend what you need and pay it back when you can. You can save money on interest over the course of the loan by paying for one project at a time. The interest rate on HELOCs is often lower than other types of loans because it is secured by your home equity.
Just make sure to do your research before committing to a loan, as there will still be closing costs and fees associated with taking out a HELOC, and these vary substantially from lender to lender.
How does a HELOC work?
A Home Equity Line of Credit, or HELOC, is a type of home equity loan that offers low interest rates and repayment that is adaptable to your needs. It is the perfect solution for homeowners who have built some equity in their homes and are looking to spruce up their living space.
HELOCs work differently than other types of home equity loans and personal loans. With a traditional home equity loan you receive a lump sum payment for the full loan amount at the start of the loan and immediately begin paying interest on the full amount. In contrast, a HELOC is a line of credit, so it works more similarly to a credit card. You make cash withdrawals up to the credit limit determined by your lender and only pay interest on the amount of the credit line that is being used. Like a credit card, you can repay the outstanding balance and redraw as needed from the credit line.
HELOCs also differ from other loans in that they are divided into two periods: the draw period and the repayment period. The draw period typically lasts from 5-10 years but varies by loan agreement and lender. During the draw period, you can withdraw funds from your credit line when needed. You can usually also choose to pay down the balance and make additional draws. You will begin to accrue interest during this time and most lenders will only require minimum payments on that interest during this period.
When the loan enters repayment, you will no longer be able to make draws from your credit line (although many borrowers will allow you to "renew" your loan draw period at this time). Loan repayment terms vary, but usually last from 10-20 years. At this point, you will be required to make payments on both the principal balance and interest until the credit line is paid off.
HELOC interest rates
A HELOC is a great way to save money on interest when financing home improvement projects. Like other home equity loans, a HELOC is secured by the equity you have built up in your house. Equity is the amount of your home that you own, in comparison with the portion still owned by the bank in the form of a mortgage. A home equity line lets you benefit from that home equity by using that equity as collateral.
For this reason, interest on a HELOC is significantly lower than other forms of unsecured borrowing, such as credit cards, personal loans, and home improvement loans. Average HELOC interest rates range from 6-10% but fluctuate with the market because they are indexed on the prime rate (usually the federal funds index rate). Other factors that will influence your interest rate include you credit score and credit history as well as lender margins.
HELOCs are available with either fixed interest rates or variable interest rates. With a variable interest rate, the interest rate will be adjusted alongside the prime rate it is indexed on. If the Federal Reserve raises rates, your rate can go up, and if the prime rate goes down, so will your interest rate. This means you could potentially spend a lot more (or a lot less) on interest over the lifespan of the loan depending on market trends.
A fixed interest rate will give you financial predictability because your rate will remain the same throughout the course of the loan. However, if the prime rate goes down, you will be left with a higher rate of interest.
Some lenders also offer a hybrid interest loan, which starts with a variable rate during the draw period and switches to a fixed rate during the repayment period. There are HELOCs on the market with introductory interest rates that start out low, but be careful of large increases over time.
Home Improvement Tax Deductions
For homeowners, potential tax savings can often be found by taking advantage of interest deductions on home equity loans and Home Equity Lines of Credit (HELOCs). These deductions are available only if the funds from these loans were used to substantially improve the house that secures the loan. Currently, joint filers can deduct the interest on up to $750,000 worth of qualified loans, while single filers or married filers filing separate returns can deduct interest on up to $375,000. These figures represent a reduction from prior limits of $1 million for joint filers and $500,000 for individual tax returns. In order to take full advantage of this benefit, taxpayers must itemize their deductions rather than opt for standard deduction options.
For those that do opt to itemize deductions related to a home equity loan or HELOCs, it is important to accurately record any records needed in order to substantiate these documents as well as stay diligent in compliance with any applicable IRS guidelines associated with such deductions. Further information in regards to these deduction limits and available tax savings should be discussed with a certified public accountant or other licensed tax professional since individual circumstances within each unique situation may vary greatly.
Return on investment
Investing in home renovations is often a smart move for homeowners, regardless of whether you’re thinking about selling your house now or not. Adding value to your home by way of an upgrade can have very real benefits, both financially and in terms of creating a more comfortable space for you and your family. If you do plan on selling your house, the return on investment (ROI) from a few thoughtful improvements can be quite impressive. For instance, research has shown that remodeling projects like updating bathrooms and kitchens can yield up to 60% or more of their cost recouped upon sale. Even seemingly small investments in landscaping projects or exterior upgrades can pay off as well, improving buyers' impressions and helping homes sell faster and at a higher price point than they would without those upgrades.
As with any investment, making wise decisions is key when it comes to choosing which improvements to pursue. Prioritize projects that are most important to your own comfort and enjoyment of the space first; spend some time doing research online and consult professionals when needed to maximize potential ROI. An experienced real estate agent will be able to recommend great options for increasing curb appeal that fit within your budget and ultimately help bring potential purchasers through the
When is it a bad idea to use a HELOC for home improvements?
Using home equity to finance home improvement projects can offer several advantages. Homeowners can access funds quickly and often at a relatively low rate of interest. However, with these benefits come significant drawbacks that should be carefully considered before using home equity for such purposes.
The biggest drawback to consider is the risk of losing your home should your financial situation change shortly after taking out the loan. If you become unemployed or fall behind on payments due to unforeseen circumstances, then you could face foreclosure if you cannot pay back the accumulated debt. A foreclosure can wreak havoc on one’s credit score and render them ineligible for further loan opportunities in the future, which adds even more pressure if they are facing financial hardships and trying to stay afloat. Additionally, after taking out a large sum on a loan secured by a home equity line of credit (HELOC), it is important to understand how long it will take to recoup the money spent through the increased market value of the property as it may be difficult or impossible to do so through real estate appreciation alone.
When considering a home equity line, homeowners should be aware that additional costs can add up. Besides the interest, there are also closing costs and fees. This cost could range anywhere from two to five percent of the loan amount and can include an origination fee, appraisal fee, title search fee, and more. Additionally, some lenders may implement both points – a percentage of the total loan amount – and origination fees to cover processing costs that typically range from one to eight percent.
In order to assess if this type of borrowing makes financial sense for your situation and needs, it’s best to factor in all of these additional charges along with the interest rate associated with the loan before signing on the dotted line. Depending on your circumstances, you may have other options available that might not carry the same upfront costs or require tapping into your equity at all. To make an informed decision about what works best for you financially, it’s recommended that you research all available options before committing to any type of loan.
Remodeling ideas
When taking out a Home Equity Line of Credit (HELOC), it is important to understand what you are getting into and wisely use the funds. No matter the reason for taking out a HELOC, always remember that these funds are not free money and that they must be repaid with interest. That being said, use these funds only as needed and avoid going on spending sprees. Consider making additional payments during the draw period; this can help avoid sky-high payments later on due to compounding interest rates, even if you are paying the minimum amount each month.
Additionally, shop around for mortgages that offer fixed rates rather than relying on adjustable ones that may dramatically increase your monthly payments in just a few years' time. Fixed-rate mortgages guarantee the same payment throughout the entirety of the repayment process, making it easier to budget accordingly without having to worry about dramatic changes in expense down the line. By shopping around for an ideal loan rate and using your HELOC responsibly, you can save yourself from financial strain in the years to come.
Kitchen Renovations
One popular home improvement choice is kitchen renovations, as this can substantially increase the value of your property over time. Depending on what kind of additions and changes you plan on making, it is important to factor in both materials and labor costs when determining a budget. Always make sure to consult a contractor or designer for advice as they can provide insight into what is feasible and how much each project may cost.
Some projects that can improve your kitchen include replacing old appliances with energy-efficient ones, adding an island or other counter space for additional storage, refin ishing cabinets, and installing new flooring. Doing these renovations correctly can not only increase the value of your home but also provide a quicker, higher return on investment (ROI).
Bathroom Renovations
Bathroom renovations can also be a popular home improvement choice, as this can increase the value of your property over time. Depending on what kind of additions and changes you plan on making, it is important to factor in both materials and labor costs when determining a budget. Always make sure to consult a contractor or designer for advice as they can provide insight into what is feasible and how much each project may cost. Some projects that can improve your bathroom include replacing old fixtures and fittings with updated options, upgrading flooring, adding new tile or marble countertops, and installing new shower systems.
Again, doing these renovations correctly can not only increase the value of your home but also provide a quicker, higher return on investment (ROI). Additionally, if you are thinking of selling in the future, these renovations can make the property more appealing to potential buyers.
New Roof
When it comes to home improvements, one of the most important projects that should be considered is a new roof. A new roof can not only boost the curb appeal of your home, but it can also increase its value and help protect you from weather-related damage. Depending on the type of materials used for the roof, such as shingles or metal panels, costs can vary significantly. It is important to do research into what fits both your budget and needs before making any final decisions.
Landscaping
Major landscaping projects, such as installing a new lawn or large flowerbeds, can also be a great way to improve the look of your property. Depending on what kind of changes you plan on making, it is important to consider both materials and labor costs when determining a budget for these projects. Before beginning any major landscaping project, it is important to consult with an experienced gardener or landscape designer who can give insight into what is feasible and how much each project may cost. Landscaping projects may include things like laying down sod for a new lawn, adding trees and shrubs, installing pathways and seating areas for outdoor entertaining, and creating beautiful flowerbeds.
/Spruce-Up
If you are looking for a way to add value to your home without breaking the bank, it is possible to spruce up the existing features with fresh paint and small repairs. Painting can change the entire look of your home, making it more inviting and aesthetically pleasing. Smaller repairs, such as fixing broken door frames or loose stair treads, can also improve the overall look of the property. Depending on what kind of changes you plan on making, it is important to factor in both materials and labor costs when determining a budget for these projects.
The bottom line
Overall, there are many ways to use a HELOC for home improvement and it can be an excellent option for those wanting to make improvements without breaking the bank. A HELOC is a low-interest loan that allows you to borrow money against the equity of your home, making it a great way to finance projects with a higher return on investment (ROI). As always, it is important to do your research and consult professionals before starting any major projects. By taking these steps, you can be sure that you are making smart investments in your home.
