Oh, the things you could do with your home if only you had the money. Remodel the kitchen, overhaul that ugly bathroom, or just fix the roof. But who has thousands of dollars just lying around to be funneled into a renovation project?
Well, if you own your home and have built up equity by faithfully making those mortgage payments over the years, perhaps you do. A home equity line of credit, or HELOC, lets homeowners borrow money by using their home equity as collateral.
“A home equity line of credit is one of the most versatile lending facilities to have in your financial arsenal,” says John Cindric, a financial adviser with BlueShore in North Vancouver, British Columbia.
Interested? To qualify, banks expect homeowners to have 10% to 20% equity in their financed home after taking out the HELOC. In addition, homeowners are required to provide proof of income and have steady employment and a good credit score.
Ideally, of course, the improvements made with the borrowed funds will increase the home's value, which makes it appealing to owners fixing to put their home on the market. But a HELOC-funded renovation can also benefit homeowners who just want to make the most of their space.
Either way, here are some tips on how to leverage a HELOC.
Use a HELOC like a credit card
Think of a HELOC as a cross between a mortgage and a credit card, Cindric says.
"It is similar to a credit card in that it is a revolving credit facility where you can use it, carry a balance, pay it off, and use it again," he says.
That means you get the flexibility of being able to borrow the amount you need, when you need it.
“As you repay your outstanding balance, the available credit amount is replenished. This means the amount you can borrow increases, up to your credit limit,” says Darcie Gore, senior lending manager at Chase Home Lending in New York.
Immediately pay contractors for big projects
That luxurious new master suite is going to require a lot of subcontractors—and they're going to want to get paid right away. A HELOC can come in handy if you need to pay contractors and manufacturers on the spot by check—especially considering many contractors do not accept credit cards for payment.
“Homeowners can access a HELOC by check and can use the checks to make payments as they see fit,” says Angela P. Dowd, vice president of retail product management at Comerica Bank in Troy, MI.
And if you find yourself longing for plastic, Dowd says some banks allow you to access your HELOC through a credit card.
Depending on your bank, you may also be able to transfer funds online to a checking or external account, or get a cash advance, Gore adds.
Save more green in the long run
Saving money is always a good thing, but it's especially important during an expensive remodel. Generally, a HELOC carries a lower interest rate than many types of credit cards and personal loans, says Gore. Therefore, using a HELOC may be more cost-effective for homeowners who need to carry a balance for a while.
And there are other advantages. Under the Tax Cuts and Jobs Act, homeowners may be able to deduct the interest on HELOCs from their taxes, but only if the funds are being used to buy, build, or improve their home. Of course, there is a limit to the deduction you can take. Any new loan taken out from Dec. 15, 2017, onward—whether a mortgage, home equity loan, HELOC, or cash-out refinance—is subject to the new lower $750,000 limit for deducting mortgage interest.
“When you use a home equity line of credit for home improvements, a portion of your interest may be tax-deductible. Because tax laws vary from state to state, I recommend homeowners talk with a tax adviser about what interest may be deductible based on your situation,” says Gore.