What's your best financing option?

Should I Use a HELOC for Home Remodeling and Repairs?

by Paige Estigarribia

How to Conquer Debt eBook

Your bathroom faucet is constantly leaking. Upgrading your windows could reduce heating and cooling costs. And you'd love to redo your kitchen cabinets. But how to pay for all that? In 2016, the average homeowner spent $5,517 on home repairs for the year.

Knowing that home repairs and remodeling can sometimes get expensive, maybe you've asked yourself whether using a HELOC (Home Equity Line Of Credit) to cover the costs is a good idea. Some would argue that a HELOC is the best instrument to finance a repair or remodeling project. Let's examine some of the pros and cons of using a HELOC.

Pros of Using A HELOC for Remodeling or Repairs

Since HELOCs are typically based on how much equity you have in your home, you'll need to have sufficient equity to take advantage of a HELOC. Usually home repairs or remodeling projects are expenses that can ultimately be part of the long-term value of your home.

When using your HELOC to pay for home repairs, you are essentially using the equity in your home to improve your home. The key is to make sure you don't increase your overhead to the point that it's outside your budget or uncomfortable.

Because you're using equity in your home, your lender will not let you borrow more than your home is worth. That limit will help you avoid a "runaway project" that keeps growing and getting more and more expensive.

Compare HELOC rates.

Using a HELOC will be cheaper than other financing alternatives. Depending on your credit score, using a credit card to finance your repair or remodel could cost 5% or more than a HELOC.

Getting an unsecured personal loan is another alternative, but unless you have a great credit score, you can expect the rate to be higher than you'd pay for a HELOC.

Related: Should You Use a 401k Loan to Pay for a Bathroom Remodel?

Cons of Using a HELOC for Remodeling or Repairs

One of the potential drawbacks to using a HELOC is that if your home declines in value, you could be stuck with debt that exceeds the value of your home. That could cause a problem if you wanted to sell. You won't be prevented from selling, but a "short sale" is often time consuming and complicated.

You will also be limited to how much your loan will be. Lenders will only lend you a certain percentage of the value of the equity in your house. If your project is more expensive than your available equity, you'll need to find another alternative.

Make sure you verify how the HELOC interest rate will be calculated. If you have a variable interest rate, your payment will rise, perhaps to unaffordable levels. And a HELOC is tied to your home, so if you find that you can no longer keep up with payments, then your home could be at risk.

Updated January 2018

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Paige Estigarribia is a writer for The Dollar Stretcher who enjoys writing about food, frugal living, and money-saving tips. Visit Paige on Google+.

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