Using a HELOC to Renovate My Home

There are many reasons you might decide to embark on a home renovation project. Whether you’re looking to refresh your kitchen and bathroom or completely update your entire property, you’re likely looking at a significant out-of-pocket expense.

Home projects can easily cost thousands — if not tens of thousands — of dollars, and both labor and building material costs seem to be rising every single day. Rather than deplete your savings or rely on credit cards to cover these invoices, a home equity line of credit (HELOC) might be the right option for you.

Here’s a look at what this line of credit offers, who’s eligible to get it, and why it could be the best choice for your next home update.

What a HELOC Does

A home equity line of credit, or HELOC, is an open-ended line of credit offered by banks, credit unions, and other lenders, secured by that equity in your home. With this line of credit, you can pull from your home’s equity as needed (up to your allowed credit limit) for nearly any purpose, whether it’s remodeling the kitchen, building a pool, or replacing the HVAC system when it unexpectedly goes out. 

HELOCs have a defined draw period (usually about 10 years) during which you can borrow against the line of credit. During this time, the lender may only require you to make interest-only payments on the borrowed amount. After the draw period ends, you’ll enter a repayment period for your HELOC (often another 15-20 years) and will be required to repay the principal amount borrowed plus interest.

Why Use a HELOC to Renovate Your Home

So, what makes a HELOC worth considering if you’re thinking about tackling a home renovation project? 

1. It gives you access to cash that would otherwise be unused

The difference between your home’s current market value and what you still owe on the property is its equity. This equity in your home will usually go untouched until it’s time to sell,  unless you borrow against it with a HELOC or home equity loan. 

Rather than borrowing elsewhere, consider how a HELOC can give you access to the valuable equity you already own.

2. It’s often more affordable

In general, the average interest rate on unsecured debt — such as a personal loan or credit card — is notably higher than the debt that’s secured by collateral, such as a home or other valuable asset. Because unsecured debt poses a higher risk to the lender, it will cost you more to borrow this money in the long run.

HELOCs, however, are secured by your home’s equity. For this reason, interest rates are usually lower than if you took out a personal loan or funded your home renovation with a credit card.

3. It can be easier to get than other types of (unsecured) loans

We already mentioned that HELOCs are less risky for lenders, since your home’s equity acts as collateral for the line of credit. Well, because of this, HELOCs can sometimes be easier for borrowers to obtain, especially when compared to large personal loans or other funding options.

You’ll still need to meet your lender’s requirements in terms of credit score, income, and maximum loan-to-value (LTV). However, if you’re looking to borrow a substantial amount of money, it could be easier to qualify for a HELOC than the same value in unsecured loans.

4. You may qualify to borrow more money

While there are high-limit lenders out there, many personal loans are limited to between $30,000 and $50,000. And that’s assuming you even qualify to borrow the maximum amount.

HELOCs, on the other hand, offer much higher borrowing limits, as long as you have enough equity to borrow against. 

If your HELOC lender allows for a combined LTV of 90% on your $400,000 home, for example, and you only owe your mortgage lender a remaining balance of $80,000, you could potentially borrow as much as $280,000!

5. You’ll have access to a line of credit if you need more money

When you take out a personal loan, it’s important to know exactly how much money you’re going to need for your project. Unfortunately, home renovations don’t always stay on schedule or within budget… so you may find yourself needing additional funds as the project goes on, if you go over budget or decide to extend your project

Rather than taking out another loan or using revolving, high-interest debt (like a credit card), a HELOC can provide you with the funds you need now and give you a financial safety net in case you need more later. You can continue borrowing against that line of credit until you reach your maximum or your draw period ends, whichever comes first.

Bottom Line

The irony of using your home’s existing equity to renovate that very same home probably won’t be lost on you. As wild as that may seem, though, a HELOC can actually be a great way to gain access to the funds you need for home projects, updates, or repairs, especially if you’re looking to lock in the lowest possible interest rates. 

With a HELOC, you may be able to borrow more than you would with unsecured debt, such as credit cards or personal loans. And since the lender holds your home’s equity as collateral against that debt, it may be easier to qualify for competitive interest rates, which will save you money in the end.