Budgeting

A Complete Guide to Use HELOC for Home Improvement

Tom BurchnellReviewed by

Looking to make a few improvements to your home but need cash? Discover all you need to know about using HELOC for home improvements.

From cracked pipes to out-of-date appliances and beyond, homes always need updates and repairs. And then there are the improvements you just plain-old want. Whether you’re dreaming of a pizza oven or replacing your roof, renovations are expensive. Luckily, there are several options for homeowners.

Flexible Home Equity Line of Credit (HELOC) loans are one of the most popular ways to fund renovations. But what is a renovation loan? And should you use the HELOC financing option for home improvement?

In this short guide, we’ll explain everything you need to know about this type of renovation loan and your other affordable home improvement line of credit options for making improvements.

All About Home Equity Lines of Credit (HELOC loans)

HELOC loans for home improvements can be described as a combination of a credit card and a home equity loan for a remodel.

  • When you apply for HELOC, you get access to a specific amount of funds on an as-required basis. Have a HELOC for $50k? You won’t have to start making payments until you’ve actually spent some of the money. And if your project’s closing costs end up being much less than you anticipated, you’ll only need to repay the money you actually spent.
  • Your HELOC home improvement loan limit depends on the amount of equity you have in your house. You can usually take out 85% of your home’s appraised value minus the amount you owe on the mortgage.

For example, if you owe $100,000 on the house valued at $300,000, you could take out 85% of your home’s lump sum value ($255,000) minus your mortgage balance ($100,000), resulting in a credit line of $155,000.

Wondering how to use HELOC for home renovations as a homeowner?

To take out a HELOC loan, you’ll need at least 20% of your home’s equity. The loan will be secured against your home, functioning as a second mortgage (besides your existing mortgage). But before you apply for a loan, weigh the pros and cons of this loan type.

Benefits of HELOC Loans vs. Home Equity Loans

As above-mentioned, a HELOC loan works like a credit card. Once approved, you can use the funds necessary by transferring them, writing a check, or simply swiping a card.

Because you have complete control of how much money you spend, this option has more flexibility than home equity loans, which are always for a fixed monthly payment amount.

There are several other benefits to HELOC vs Home equity loans for home improvements. These include:

  • A lower upfront cost
  • Similar initial interest rates

However, a HELOC home renovation loan isn’t always the right loan option for the borrower.

Downsides of HELOC Loans for Home Improvement

While HELOC loans may be less expensive than other borrowing options, they may have certain fees such as loan term origination fee, annual fees, and early closure fees. These fees vary, so it’s important to have a clear discussion with the lender before signing any agreement. 

There are a few other negatives to keep in mind:

  • The credit is secured against your house – If you have trouble making payments on your HELOC, you could face foreclosure proceedings and credit union trouble.
  • You pay more as the time duration increases – A HELOC loan is usually divided into two phases—a draw period and a repayment period. The draw period is typically 5-10 years, during which you pay a monthly minimum that only covers the interest. The next phase is the repayment phase, which lasts 10-20 years. During this phase, the monthly payment increases as you repay both the interest and principal amount. 
  • The repayment phase is unpredictable due to variable interest rates – Your initial interest rate only applies for the first few months. After that, the variable interest rate is adjusted on the basis of the prime rate. 
  • You’ll need to repay your loan before you can profit from a sale – Want to sell your newly remodeled house and move? You’ll have to pay off your mortgage and your HELOC, which will leave less profit for you to invest in your next living space.

Convert your Home Equity to Cash

Home Improvement Loan Alternatives to HELOCS

HELOCs aren’t the only way to afford home renovations. If you’d prefer to make improvements to your home with a fixed interest rate, other options include:

Mortgage refinancing

A cash out refinance from your mortgage lender enables you to take out cash based on your home’s equity. While you’ll still be adding to your overall debt burden and loan amounts, your home remodel financing will be rolled into your mortgage rate, which should be more predictable than the interest rate on a HELOC.

Sale-leaseback

Want to upgrade your home without raising your monthly payments? EasyKnock’s sale leaseback solutions for homeowners allow you to sell your home, stay in it for as long as you like, and use the extra cash to make improvements that enhance your day-to-day life.

Improve Your Home and Your Finances With EasyKnock

A HELOC is one potential way to pay for renovations, but keep in mind that any loan taken out against your home equity poses a financial risk. Before taking one out, consider whether you could continue making payments after an injury or job loss.

At Easyknock, we know you’ve spent years developing equity in your home. We think you should be able to afford improvements without adding to your debt.

Our custom solutions for homeowners help you convert your home equity to cash and meet your long-term goals, whether those mean staying in your current home at a lower monthly cost or finally getting a jacuzzi. Our solutions are called sale-leasebacks and they are exactly how they sound. You sell your house to EasyKnock and lease it back. You get the money you need from the sale and you get to stay in your home as a renter until you’re ready to decide on your next steps. We also have options that allow customers to repurchase their home or to move and have EasyKnock sell the house on the open market. Customers also receive any appreciation from the sale.

Get in touch today to learn more about how you can access your equity and improve your quality of life.

This article is based on research and/or other relevant articles and contains trusted sources. Our goal at EasyKnock is to provide readers with up-to-date and objective resources on real estate and mortgage-related topics. Our content is written by experienced contributors in the finance and real-estate space and all articles undergo an in-depth review process.

Sources: 

  1. Forbes. Home Improvement Loans: Everything You Need To Know https://www.forbes.com/advisor/personal-loans/home-improvement-loans/
  2. Renofi. Should You Use A Home Equity Loan or Line of Credit To Pay for A Renovation? https://www.renofi.com/guides/home-equity-loans-for-renovations/
Tom Burchnell
Product Marketing Director

Tom Burchnell, Director of Digital Product Marketing for EasyKnock, holds an MBA & BBA in Marketing from University of Georgia and has 6 years of experience in real estate and finance. In his previous work, he spent time working with one of the largest direct lenders in the SouthEast. 

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