3 Reasons to Finance Home Improvements With a HELOC

by Maurie Backman | Published on Aug. 29, 2021

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A contractor working on a kitchen renovation.

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Here's why a HELOC could be a good way to pay for your renovation.

Most of us have spent more time at home over the past year and change. As a result, many of us are more invested in making our homes more livable.

If you're thinking of renovating your home, you may not have the money to pay for that work outright, especially if the improvements are extensive. Though you have options for financing your renovations that include personal loans and home equity loans, here's why home equity lines of credit (HELOCs) make a lot of sense.

1. They're flexible

Normally, when you borrow money, you take out a loan for a specific amount and pay it off over time. HELOCs work differently.

With a HELOC, you get a line of credit that you can take withdrawals from over time -- usually five to 10 years. You borrow as little or as much you need, depending on how your renovations go.

Say you're redoing your kitchen, and it's hard to estimate the cost. You might think you'll spend a minimum of $15,000 and a maximum of $30,000. With a HELOC, you can get approved to borrow $30,000 -- but if you only need $20,000, you can leave the remaining $10,000 untapped and avoid accruing interest.

But say your kitchen remodel only costs $16,000, so you'd like to redo your bathroom, too. If you have $14,000 left over in your HELOC, you can use that money to fix up your bathroom -- without applying to borrow again.

2. They're affordable

The interest rate on a HELOC is generally lower than the rate on a personal loan for home renovations. That, in turn, could save you money.

HELOC interest rates can be variable -- you may start one with one rate and see it climb over time. Even so, that rate may start out so affordable that even if it rises, you're still not spending a fortune on interest.

3. They're fairly easy to qualify for

To qualify for a personal loan, you need a good enough credit score, since there's no asset securing that loan. But the main factor lenders look at for HELOCs is the amount of equity in your home. If that equity is there, qualifying becomes pretty easy since your home is used as collateral.

Say your home's market value is $300,000 and you only owe $220,000 on your mortgage. That means you have $80,000 in equity. If you apply for a $30,000 HELOC, there's a good chance a lender will say yes.

To be clear, HELOC lenders do look at your credit score. But you can usually get away with having a less competitive credit score if you have enough home equity to support the amount you want to borrow.

Though you have options in paying for home improvements, it makes sense to look at a HELOC for your next project. You may find that it's the easiest and most affordable way to get the job done.

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