Oh, the things you could do with your house if only you had the money. Reshape the kitchen, remodel that ugly bathroom, or just repair the roof. But who has thousands of dollars lying around to spend on a home improvement project?
Well if you own your house and you have built equity by faithfully making those mortgage payments over the years, that may be the case. A Home equity line of credit, or HELOC, allows homeowners to borrow money using the equity in their home as collateral.
“A home equity line of credit is one of the most versatile lending facilities to have in your financial arsenal,” says Jean Cindric, financial advisor at BlueShore in North Vancouver, British Columbia.
Interested? To qualify, banks expect homeowners to have between 10% and 20% of their home’s equity financed. after take out the HELOC. In addition, owners are required to provide proof of income and to have a stable job and a good credit rating.
Ideally, of course, the improvements made with the borrowed funds will increase the home’s value, making it attractive to homeowners who want to put their home on the market. But a HELOC-funded renovation can also benefit homeowners who just want to make the most of their space.
Either way, here are some tips on how to take advantage of a HELOC.
Use a HELOC like a credit card
Think of a HELOC as a cross between a mortgage and a credit card, explains Cindric.
“It’s similar to a credit card in that it’s a revolving credit facility where you can use it, keep a balance, pay it off, and use it again,” he says. .
This means you have the flexibility to borrow the amount you need, when you need it.
“As you pay off your outstanding balance, the amount of available credit is replenished. This means that the amount you can borrow increases, up to your credit limit, ”explains Darcie gore, senior director of loans at Chase Home Lending in New York.
This new luxurious master bedroom will require a lot of contractors and they will want to get paid straight away. A HELOC can be useful if you need to pay contractors and manufacturers on site by check, especially since many contractors do not accept credit cards for payment.
“Homeowners can access a HELOC by check and can use the checks to make payments as they see fit,” explains Angela P. Dowd, vice president of retail product management at Comerica Bank in Troy, MI.
And if you’re in the mood for plastic, Dowd says some banks allow you to access your HELOC through a credit card.
Depending on your bank, you’ll also be able to transfer funds online to a checking or external account, or get a cash advance, Gore adds.
Save more green in the long run
Saving money is always a good thing, but it’s especially important during an expensive renovation. Typically, a HELOC carries a lower interest rate than many types of credit cards and personal loans, Gore explains. Therefore, using a HELOC can be more cost effective for owners who need to carry a scale for a period of time.
And there are other advantages. Under the Tax Cuts and Jobs Act, owners can deduct interest on HELOCs from their taxes, but only if the funds are used to buy, build or improve their home. Of course, there is a limit to the deduction you can take. Any new loan taken out on or after December 15, 2017, whether it is a mortgage, home equity loan, HELOC or cash refinance, is subject to the new lower limit. of $ 750,000 for mortgage interest deduction.
“When you use a home equity line of credit for home renovations, some of your interest may be tax deductible. Since tax laws vary from state to state, I recommend that homeowners discuss with a tax advisor what interest may be deductible depending on your situation, ”Gore explains.