Using a HELOC for Home Improvements: What To Know
Key Takeaways
- You may be able to borrow at an affordable rate by tapping your home equity.
- You must have equity in your home to qualify for a HELOC.
- HELOCs can have varying terms, so you should explore all your borrowing options.
A home equity line of credit (HELOC) is one option homeowners can use to pay for home improvements. HELOCs can offer more flexibility than many other kinds of mortgage loans. In some cases, interest can also be tax-deductible for qualifying home improvements. This guide will explain how you can use a HELOC to pay for home improvements and make sure it meets your affordability and financial goals.
How Can You Use a HELOC for Home Improvements?
If you can't pay for home renovation costs with cash, a HELOC allows you to tap into the equity in your home to cover home repairs or improvement costs. If you have available home equity and can qualify for a HELOC, it may offer a more affordable interest rate than other borrowing alternatives.
Here's how you can use a HELOC to cover your costs.
- Phased home updates: With a Freedom Mortgage HELOC, you receive a lump sum up front you can use to fund the project. As you pay back the amount borrowed, you can take another draw to complete the next phases of your project.
- Unexpected costs during home projects: As you repay your Freedom Mortgage HELOC, you become eligible for redraws without going through underwriting again This can allow for relatively quick loan funding so you can access money to cover unexpected costs like hidden water damage and unexpected roof repairs.
- Energy-efficient upgrades: Energy-efficient upgrades can save you money on utilities over time, and you can put part of the savings towards HELOC payments.
- Remodels and additions: Remodels and additions may increase your home's value, giving you more equity so you don't end up owing more than your home is worth after you borrow.
Some HELOCs provide flexible financing. They allow you access to a line of credit you can draw from as needed.
Freedom Mortgage's HELOC provides a lump sum distribution up front and the ability to borrow again during the draw period, as you pay down your principal. Your redraw rate is set as of the date of the draw and based on an index that may be higher than the initial fixed rate. This flexible redraw option makes it ideal for home improvement funding.
A Fast, Simple Way to Get Cash
With a Freedom Mortgage HELOC, you may be approved in as little as five minutes and get your cash in as few as five days.
Get Started
How Does a HELOC for Home Improvements Work?
If you want to use a home equity line of credit for home improvements, you will need to apply for a HELOC and get approved based on your financial credentials. Here's how it works.
- Requirements: You must meet your lender's requirements for a HELOC. If you use a specialized renovation HELOC offered by some lenders, you may need to provide detailed contractor estimates and project blueprints because your ability to borrow will be based on the value of the house as improved.
- Borrowing limits: Lenders usually limit the percentage of equity you can take out of your home. The combined loan-to-value ratio (total ratio across your current mortgage and HELOC) may be capped at 80 to 85% of what your home is worth. In most cases, this is based on the current market value, not the estimated value after improvements.
- Revolving credit: Some HELOCs are like a credit card, offering you access to a credit line you draw from as needed. Others, like Freedom Mortgage's HELOC, provide an upfront lump sum payment and the option to redraw with no new underwriting required during your draw period. As mentioned above, your redraw rate will be set as of the time of the redraw.
- Draw period: You will have a period of time when you can access new credit using your HELOC. This is called the draw period. The ability to borrow at any time during the draw period provides flexibility if you are paying for a home improvement project over time.
Pros and Cons of a HELOC for Home Improvements
To determine if a HELOC is right for you, consider the pros and cons of using a HELOC for home renovations.
| Pros | Cons |
|---|---|
|
|
HELOC Alternatives for Home Repairs and Renovations
A HELOC is not the only option to tap your equity to pay for home improvements. You can also explore alternatives like home equity loans, unsecured personal loans, credit cards, and cash out refinance loans.
You should start by comparing a HELOC and cash out refinance loan because both are popular lower-interest options for paying for renovations and repairs.
Both allow you to borrow at a more affordable rate than personal loans or credit cards and potentially claim an interest deduction if you itemize and use the funds for qualifying home improvements on the secured property (a tax advisor can provide details), but a cash out refinance for home improvements may be the most financially savvy choice if you can refinance your current mortgage to a lower rate while also accessing money for improvements.
Final Thoughts: Should You Use a HELOC for Home Improvements?
A HELOC can be a great way to pay for home improvements if you qualify and have enough equity in your home. You should also understand how different kinds of loans work so you can pick the right type of loan for you. Reach out to Freedom Mortgage today to find the right loan and apply for a HELOC to get started on your home remodel.
Christine Rakoczy has been a financial writer since 2008, contributing to major publications, including Credit Karma, CBS MoneyWatch, WSJ, and Forbes Advisor. While her special focus is diving deep into mortgages, Christine has extensive experience with all types of financial topics.
In addition to writing for online articles, Christine has also taught business administration courses at a career college and has served as a subject matter expert on numerous business and legal courses.
Christine earned her JD from UCLA School of Law in 2008 and has a BA in English, Media, and Communications, with a Certificate in Business Administration from the University of Rochester.
You Might Be Interested In
What Are the Requirements for a HELOC?
Learn About Qualifying for a Home Equity Line of Credit
What Is a Home Equity Line of Credit (HELOC)?
A HELOC Allows You to Borrow Against the Equity of Your House
Is a HELOC a Good Idea?
Learn How Your Home Equity Can Help You
What Are the Requirements for a HELOC?
Learn About Qualifying for a Home Equity Line of Credit
What Is a Home Equity Line of Credit (HELOC)?
A HELOC Allows You to Borrow Against the Equity of Your House
- ${title}${badge}