Figuring out how to finance your home remodeling project can be challenging, especially if you’re unsure about the best option for you.
One possibility to explore is a home equity line of credit (HELOC). By leveraging your home’s equity, you can secure a loan for your renovation or remodeling endeavors.
Can you use a home equity line of credit for home renovations?
Home equity is the difference between how much your home is worth and how much you owe on your mortgage. It can increase as you pay down your mortgage principal or by an increase in your home’s market value.
A home equity line of credit (HELOC) is a second mortgage that allows you to borrow against the equity in your home. Unlike a home equity loan, HELOCs distribute the funds you receive as a line of credit instead of a loan. During the draw period, you can borrow from the line of credit as needed, up to your credit limit, and only pay interest on the amount you use.
Similar to a credit card, how you use the line of credit is up to you. Since HELOCs allow for accessing large amounts of money over time, they can be especially useful for costly, long-term projects, such as home remodeling, renovations, and additions.
When the draw period ends, the line of credit closes and enters the repayment period. During this time, you are required to make full monthly payments that cover both principal and interest.
How does a home equity line of credit work for home improvements?
If you’re considering home improvements like a home addition or kitchen renovation, you might be wondering how a home equity line of credit works. First, you need to qualify for the loan based on your home equity, credit score, and debt-to-income ratio. If you qualify, your lender will determine how much you can borrow using a loan-to-value estimate.
For example, let’s say your home was recently appraised at $400,000, and you still owe $100,000. Lenders typically allow you to borrow up to 90% of your home’s equity. To calculate this, subtract the amount you owe on your mortgage from 90% of your home’s appraised value:
$400,000 x .9 = $360,000
$360,000 – $100,000 = $260,000
Therefore, the maximum loan amount you could receive with a home equity line of credit would be $260,000. After obtaining the line of credit, you could start your home renovations.
The pros and cons of HELOCs for remodels
HELOCs can be a great option for homeowners looking to remodel, but it’s important to consider both the advantages and disadvantages. Here are some pros and cons of using a HELOC for home improvements:
PROS
- You can borrow up to 90% of your home’s equity, giving you access to a significant amount of money for your remodeling project.
- HELOCs often offer lower interest rates than other types of financing, such as credit cards or personal loans, which can save you money in the long run.
- Remodeling can increase your home’s value, potentially resulting in a higher resale value down the line.
- HELOCs may offer tax benefits, as the interest you pay on the loan may be tax deductible.
- HELOCs typically have a long payback period, giving you more time to repay the loan.
CONS
- Your home serves as collateral for the loan, meaning that if you are unable to make payments, you risk losing your home to foreclosure.
- There is a set draw period for the HELOC, during which you can withdraw funds. Once the draw period is over, you can no longer access the funds.
- A HELOC is a second mortgage on top of your first mortgage, which means that you will have two loans to repay, potentially leading to more financial strain.
The bottom line
There are numerous ways to finance your home remodeling project and a home equity line of credit is a great way to do so. HELOCs offer flexible repayment terms and lower interest rates, especially compared to other financing options such as credit cards and personal loans, making them an excellent choice for funding your home improvements.
If you’re planning a home remodeling project and want to leverage the equity in your home, look into getting approved for a home equity line of credit with Loan Pronto today.
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