HELOC for home improvement

One of the most rewarding things about homeownership is watching your equity grow. Equity is the part of your home you own; it's the difference between the balance on your mortgage and your home's market value. 

A home equity line of credit (HELOC) enables you to put that equity to work by using it as collateral (something of value that backs up a loan). The funds can then be used for nearly any kind of home improvement projects from overdue repairs to a remodel to freshen up your home's appearance. 

Is a HELOC the right choice for your home improvement goals? We'll help you decide if it makes sense for you.

What is a home improvement HELOC?

A HELOC is a line of credit that's secured by your home. For the first few years, you can borrow, repay, and borrow again, as often as you like, up to your credit limit. HELOC credit limits are based on several factors, including how much equity you have, your credit scores, income, and existing debts. 

A home improvement HELOC is one you use primarily to pay for home repairs or upgrades. Every HELOC can be a bit different depending on the lender, but here's how they typically work:

• The first five to 10 years is the initial draw period, depending on your lender, during which you can use your credit line up to your limit, pay it down, then reborrow over and over.

• While in the draw period, your loan agreement will likely require you to make interest-only payments to your HELOC. 

• Once the draw period ends, the repayment period begins. This stage can last five to 25 years, depending on your loan terms and lender. You typically can't draw from the credit line anymore at this point.

• In the repayment period, you make principal and interest payments every month until your HELOC balance is paid off.

It's common for home improvement HELOCs to have variable rates, but there are some exceptions. For example, HELOCs through Achieve offer a fixed interest rate and a five-year draw period. A fixed-rate HELOC may be preferable if you want some predictability with monthly payments. With a variable-rate HELOC, your rate (and payment) could go up or down over time. 

What home improvements can you use a HELOC for?

A HELOC home improvement loan can be used to pay for a wide range of home repairs, upgrades, and renovations. Some of the ways you might use a HELOC for home improvements include:

• Appliance replacement

• Roof replacement

• HVAC/furnace replacement

• Room additions/expansions

• Electrical or plumbing upgrades

• New water heater

• Solar panel installation

• Whole-house generator installation

• Septic tank replacement

• New siding

• Flooring replacement

• Kitchen and bathroom renovations

• Landscaping or fencing

• Driveway repairs

• Pool installation

• Deck replacement

• Window replacement

• Gutter replacement

• Accessibility accommodations

The IRS even offers a financial incentive to use a HELOC for home improvement. HELOC interest is tax-deductible when you use the money to "buy, build, or substantially improve" the home that secures the loan. Consult with a tax professional to learn if your planned home improvement projects qualify for tax deductions.

HELOC vs. home equity loan for home improvements

A HELOC is one way to use your equity, and a home equity loan is another. The main differences between them lie in funding and interest rates. Both are secured by your home. 

Here's a quick explainer:

• A HELOC has a draw period, followed by a repayment period. With a home equity loan, there's only a repayment period.

• HELOC lenders may give you the option of withdrawing money as you need it, or withdrawing the full amount at the beginning of the draw period. Home equity loans give you all the money up front in a lump sum. 

• You're more likely to get a variable rate with a HELOC, though Achieve Loans HELOCs are an exception. Home equity loans typically always have a fixed rate. 

• HELOC rates can appear lower than home equity loan rates initially. If the rate adjusts later, you could wind up with a higher rate on the HELOC than a similar home equity loan. 

Both a HELOC and a home equity loan are second mortgages. So if you still have a first mortgage you're paying down, you'll have two payments to make. You'll need to be sure your budget can handle an extra payment each month.

In terms of how HELOC requirements and home equity loan requirements compare, they're typically based on the same things. Lenders look at your credit scores, income, debt, and how much equity you have. Looking at minimum qualifications for both, as well as interest rates and terms, may help you decide between a HELOC vs. home equity loan. 

Why a HELOC works well for home improvement

HELOCs are particularly well-suited to home improvement projects because of how they're structured. You can withdraw the full amount at the beginning of the draw period and use it to pay contractors, purchase materials, or buy appliances as each stage of the project unfolds. As you pay down your balance, you free up more credit for additional draws. 

A HELOC for home improvement could make sense if you're not entirely sure how much repairs or renovations might cost. If you take out more than you need, you can simply pay it back to your credit line. You can go back and make additional withdrawals if another expense comes up, as long as you're still in the draw period. 

If you have a fixed-rate HELOC, like the one Achieve Loans offers, your rate and payment won't change, which takes the stress out of budgeting and leaves you with one less thing to worry about while you get your house in order. 

Advantages of a HELOC home improvement loan

Home improvements are a popular choice for HELOCs for a few reasons. Here are some of the advantages to know as you compare HELOC options. 

• Good use of equity. Home renovations are generally considered a wise use of home equity since remodeling or renovating your home could increase its value. It could make sense to tie the debt to the home you’re improving. 

• Interest may be deductible. Taking out a HELOC for home improvements could lead to tax savings. Keep in mind that the tax deduction only applies if all the money goes to eligible home improvements. You wouldn't qualify if you used some of it for another purpose, like debt consolidation. Consult a tax professional to learn more about your tax situation.

• Save money. A HELOC may save you money compared to other options since it's a secured loan. With a secured loan, you’re borrowing against an asset, which lowers the risk for the lender, and can also lower your interest rate.

• No refinancing. Using the equity in your home doesn't require refinancing your mortgage or giving up your current mortgage interest rate. 

• Five-year draw period. If you've ever finished a project only to wish you'd done something differently, a HELOC gives you time to repay a portion of the loan and borrow the money again. That means you have the freedom to make tweaks or add something you forgot.   

• Long repayment terms. With up to 30 years to repay a HELOC, you could stretch your loan term to keep your monthly pay low. However, the longer your loan term, the more you’ll pay in interest. 

• No in-person appraisal. Some lenders use alternative forms of appraisal, so there may be no in-person visit from an appraiser. This could be convenient for you as the borrower and one less thing you have to worry about facilitating. 

• Bigger loan. HELOCs often allow a higher loan amount than other kinds of loans because it's secured by your equity. If your remodel will cost more than what you could cover with a personal loan, a HELOC may be a better option.

• Keep other credit lines open. Using a home improvement HELOC allows you to keep your other credit, like credit cards, open for other financial needs.

Disadvantages of using a HELOC for home improvement

No financial product is perfect, including HELOCs. Before borrowing against the equity in your house, be sure to weigh the pros and cons, including these potential disadvantages:

• You might have to take the funds all at once, upfront, even if you don’t need all the money yet. Some HELOCs require you to take a full draw right away, while others let you take out money a little bit at a time. 

• HELOCs are mortgages, secured by your home. Because your home acts as collateral, failure to make payments on a HELOC means risking foreclosure. If you miss payments, your lender has the right to take possession of your property, sell it, and recoup its losses. 

• HELOCs reduce your equity. Borrowing against the equity in your home means having less equity available if you need it for an emergency or need to sell the property. Having less equity can also lead to owing more on your house than it's worth if home values in your area tank.

• Borrowing costs money. Any time you pay interest over the course of years, it adds up and could cut into your ability to save, invest, or spend in some other way.