If you’re looking for capital to complete a home renovation, a smart idea to consider is taking out a Home Equity Line of Credit (HELOC). A HELOC is a line of credit that works similarly to other loans; however, it taps into your home's equity for funds. It is essentially a way to pull money out of your home, but unlike refinancing, which provides you a lump sum of money, a HELOC allows you to access money on an as-needed basis. Typically, homeowners can qualify for a HELOC of up to 85% of their home's value, but this can vary depending on the borrower's credit score and existing debt. When you access your line of credit, the amount of available credit declines, but as you pay it down, the available credit increases to its original available balance.
Many homeowners prefer to take out a HELOC for remodeling or a new roof because of its benefits, such as more affordable interest rates and lower fees compared to alternative credit sources. When determining whether or not to take out a HELOC, it’s important to keep in mind this form of credit is not right for every circumstance. As a HELOC is a variable interest rate loan, payments can fluctuate as the rate environment changes, so we encourage you to get in touch with our Mortgage Team to discuss if a HELOC is right for you.
Ways to Use a HELOC
Keep in mind that when opening a HELOC, you are borrowing against the equity in your home and if you don’t repay the debt, you can risk foreclosure. Therefore, it’s important to open a line of credit for reasons that will either add value to your home or serve a specific and responsible purpose. Here are a few instances of when you might open a home equity line of credit.
A roof's lifetime can vary depending on the materials used to construct the roof and the weather where the homeowner resides, which can impact the home's wear and tear. That being said, homeowners can typically expect to replace their roof every 20-30 years. Unfortunately, a poorly maintained roof can have additional consequences, such as damage to the home's interior or structural components. When this occurs, replacing a roof can be costly, and many homeowners may not have readily available funds for such an expense. A HELOC can offer a solution to this problem by providing the capital they need to replace the roof and preserve the value of their home.
If a remodel can improve a home's value, an individual might consider using a HELOC to cover the cost. When determining whether a remodel qualifies for a line of credit, think about how the remodel will influence the home's value and what prospective buyers will think of the changes.
For example, upgraded bathrooms and kitchens can drastically boost the look of a home, so such renovations are generally worth the investment. However, other additions such as pool installations or ultra-luxurious upgrades might deter buyers when it's time to sell. With this in mind, it may be best for homeowners to avoid relying on a HELOC to cover these renovation costs because what they add to the home is typically not worth the risk.
Capital for an Investment Property
Some homeowners like to take out a HELOC to secure capital for an investment property. With this line of credit, they can take advantage of lower interest rates and better terms compared to refinancing the property.
In this scenario, although the capital is not being used directly for the home, the homeowner is using it to increase another property's value, which increases the owner's overall wealth. However, when taking out a HELOC for such a project, consider following the same rule as mentioned above—only borrow if it increases the property's value.
Paying for Education
College can be expensive, and many homeowners turn to a HELOC to fund the cost of their children's education. A HELOC allows you to borrow only what you need, and you can often get a lower rate than you would with a private student loan, making HELOC a desirable use case for funding higher education costs.
While debt that is tied to your home can be a risk, using a HELOC to consolidate your credit card or other debts can be effective in certain situations. With a HELOC you can make interest only payments for around 10-15 years before the principal payments start kicking in, allowing for a lower monthly payment. We recommend consulting with a mortgage expert to discuss if this is the right option for you.
How to Apply for a HELOC
If you own a home and have decided that a HELOC makes sense for your situation, the steps to apply for one are simple. Teachers offers an online application that allows you to submit all required documentation to determine how much you qualify for and at what rate. Once you submit your application, one of our mortgage loan officers will get in touch with you to discuss the loan further.
Ready to get started? Get in touch with our team today!