Should I Use a HELOC for Home Remodeling and Repairs?
We examine the pros and cons of using a HELOC for home remodeling and repairs so you can make a more informed choice about how to finance your next home improvement project.
Your bathroom faucet is constantly leaking. Upgrading your windows could reduce heating and cooling costs. And you’d love to redo your kitchen cabinets.
But how to pay for all that?
Knowing that home repairs and remodeling can sometimes get expensive, maybe you’ve asked yourself whether using a HELOC (Home Equity Line Of Credit) to cover the costs is a good idea. Some would argue that a HELOC is the best instrument to finance a repair or remodeling project.
Let’s examine some of the pros and cons of using a HELOC for home remodeling and repairs.
Pros of Using A HELOC for Remodeling or Repairs
Since HELOCs are typically based on how much equity you have in your home, you’ll need to have sufficient equity to take advantage of a HELOC. Rising home prices make building equity easier.
A HELOC is usually best spent on something that will last as long as the loan. A vacation or new wardrobe would not be a good use of money from a HELOC. By comparison usually home repairs or remodeling projects are expenses that can ultimately be part of the long-term value of your home.
When using your HELOC to pay for home repairs, you are essentially using the equity in your home to improve your home. The key is to make sure you don’t increase your overhead to the point that it’s outside your budget or causes financial discomfort.
Because you’re using equity in your home, your lender will not let you borrow more than your home is worth. That limit will help you avoid a “runaway project” that keeps growing and getting more and more expensive. (See Managing the Cost of Home Projects.)
Using a HELOC will typically be cheaper than other financing alternatives. Depending on your credit score, using a credit card to finance your repair or remodel could cost 5% or more than a HELOC.
Getting an unsecured personal loan is another alternative, but unless you have a great credit score, you can expect the rate to be higher than you’d pay for a HELOC.
Cons of Using a HELOC for Remodeling or Repairs
One of the potential drawbacks to using a HELOC is that if your home declines in value, you could be stuck with debt that exceeds the value of your home. That could cause a problem if you wanted to sell. You won’t be prevented from selling, but a “short sale” is often time consuming and complicated. Often you’ll be expected to pay the difference between the home’s selling price and your mortgage balance.
You will also be limited to how much your loan will be. Lenders will only lend you a certain percentage of the value of the equity in your house. If your project is more expensive than your available equity, you’ll need to find another alternative.
Make sure you verify how the HELOC interest rate will be calculated. If you have a variable interest rate, your payment will rise, perhaps to unaffordable levels. And a HELOC is tied to your home, so if you find that you can no longer keep up with payments, then your home could be at risk.
Reviewed March 2021
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