Home Improvements with a HELOC

With more and more people working from home, people are looking to upgrade their offices or convert a garage or an unfinished basement into a useable space away from the family to get their work done.

While it may be tempting to pull out a credit card during a home renovation to get those wonderful sky miles, this option is generally not the best way to finance mid to large scale home improvement projects.

If you can sit down and accurately calculate every screw, nail, board, paintbrush, etc., you will need, and know in the end you can pay off that credit card at the end of the month, then maybe proceed with the credit card option.  But often times the project is just too big for the DIYer to calculate accurately.  We don’t have the experience to know everything we need and how much the final project will cost.  We have some pretty good guesses, but not down to the finest detail.

A Home Equity Line of Credit (HELOC) is generally considered the best way to finance mid to large scale projects.   A HELOC uses the equity in your home as collateral.

Here’s what a HELOC can do for you:

You’ll save money because you aren’t taking out a large lump sum all at once for the entire project.  This means that you aren’t paying interest on that lump sum.  Instead, you take money out in increments, based on where you are in the project and how much you need for that particular phase of the project.

HELOCs generally have flexible terms with varying interest rates and the repayment terms are also flexible.  This means that instead of paying a credit card rates of up to 20%, you are keeping that cost a lot lower.  Plus, to keep your costs down during the project phase, many lenders only require borrowers to make payments toward the interest of their loan during this draw phase.  Once the draw period is over, then you begin to pay on the principle.  This can be a helpful benefit in certain situations.

Renovations to increase value:  Make sure you evaluate if your home improvement project adds to the value of your home.  If you are going to take out a HELOC, you will want to make sure you get a good return on your time and money if you have to sell the house.  There is a difference between the “appeal” of a home and its actual “value”.  While changing the color of the tile from blue to cream might increase the “appeal” of the home, it does little in changing the value it will appraise for.  Finishing an unfinished space such as a basement will add to your home’s value with the added benefit that the structure is already there.  Likewise, additions which increase the square footage of the home, are generally safe investments in your time and money as long as you go through the permit process and have copies of the permits during the sale process.

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