OPINION: How to use a HELOC for home improvement

Published 11:26 am Monday, October 7, 2024

Interest rates have officially dropped and headlines everywhere are talking about how the housing market is about to heat up like we haven’t seen in a few years.

For those of us who are not in the market for a new home, though, it feels like the rate drop is for everyone else.

But that is not the case. Interest rates dropping don’t only make mortgages more affordable, they also affect auto interest rates, credit cards and home equity lines of credit (HELOC).

While many readers have heard of a HELOC, I wanted to take the time to explain what exactly it is and does.

What is home equity?

Home equity is the part of your home’s value that you own outright. It’s the difference between the total amount your home is worth and what you owe on your home (your mortgage). It can be a valuable tool to help you build wealth over time as your home increases in value. The equity in your home can be used for just about anything, from home improvements or debt consolidation to education expenses and beyond. Whatever you plan to use it for, it’s always a good idea to consult a financial advisor and think through your current and future financial situation and your goals.

How does a HELOC work?

A HELOC is a line of credit that uses your home’s equity to help you pay for home improvement projects, your child’s education or other expenses, like consolidating medical bills or credit card debt. This can also be a great way to pay for adding on a home office, making some extra space for your kids, or putting in an accessory dwelling unit for potential future income.

There is typically a “draw period” where you can withdraw money from your HELOC, and you only pay interest on the amount you actually use. This draw period varies by lender, and during this time you’ll make interest-only payments. After that, you’ll begin paying back the leftover balance on your HELOC and you won’t be able to draw, or borrow, from your HELOC anymore. Your HELOC balance is repaid with monthly payments which are amortized, or spread out, over a certain number of years.

Qualifying homeowners may be approved to borrow a certain amount of money and access funds as needed. For example, if you are approved for a HELOC of $10,000 you can choose to use part of it to pay off medical bills now and the other part to pay for a home office remodel later on. If you don’t end up withdrawing any money, you won’t owe anything and you will not have to make payments. (WaFd Bank doesn’t charge a yearly fee, but some lenders do, so be sure to ask about that before applying.)

A HELOC provides a readily available line of credit

Similar to a cash out refinance, a HELOC gives qualifying homeowners the ability to borrow a certain amount of money and access the funds as needed without actually refinancing your home. Again, if you do not end up withdrawing any money, you will not owe anything. This may be better than a cash out refinance as you will pay interest on the entire amount of your loan from the day you close, which might be higher than the interest rate you enjoy on your mortgage today.

A HELOC is a nice security blanket for unforeseen events that life may throw at you. It will also give you the flexibility to withdraw funds, pay back the principal when you can, and even withdraw later during the initial draw period without paying additional lending fees.

A HELOC can be more affordable than making large purchases by credit card or by starting another type of loan if you qualify for a competitive interest rate and don’t have to pay annual renewal fees. You may also qualify for additional tax deductions available for any costs or interest paid on your HELOC based on your situation. Please consult your tax professional regarding the deductibility of interest and charges.