What's your best financing option?
Should I Use a HELOC for Home Remodeling and Repairs?
by Paige Estigarribia
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.
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
Take the Next Step:
- Find out what a HELOC would cost.
- Home improvements can be costly. For many projects, we can help you save. Just visit the Home Improvement section of the Dollar Stretcher Library before you start that next project.
- Don't miss a builder's advice on what you need to know about budgeting for home remodeling.
- Once those home improvements are done, why not take some time to improve your finances? The TDS ebook How to Conquer Your Debt No Matter How Much You Have can provide you with the tools you need to demolish your debt and rebuild your finances.
- Join those who 'live better...for less' - Subscribe to The Dollar Stretcher newsletter, a weekly look at how to stretch both your day and your dollar! Subscribers get a copy of our ebook Little Luxuries: 130 Ways to Live Better...For Less for FREE!
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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