Considering Some Home Improvements? HELOC At This!

If you have enough equity in your home to qualify, a  home equity line of credit (HELOC) can be a convenient way to borrow money to fund a major home renovation.

Of course, what you do with the money from a HELOC is entirely up to you. In addition to home enhancements, you can use your HELOC to pay off high interest debt, college tuition or medical bills, renovate your bath or kitchen, take a vacation or pay for other expenses. 

What is the difference between a home equity loan and HELOC?

Two of the more popular ways to borrow against your home’s equity are with a HELOC or with a home equity loan (HEL).

A HELOC works more like a credit card than a HEL, because you have access to money, but you are not required to use it. The credit union approves you for a specific loan amount, but does not give you the money in a lump sum. 

With a HELOC, you only use the amount of money you need, when you need it. A HEL, on the other hand, requires you to take out a lump sum of money and begin payments immediately. This makes a HELOC a more flexible option.

A HEL comes with a fixed interest rate, while a HELOC comes with a variable rate, which means your payments can change if interest rates rise or fall. 

Why should I get a HELOC?

If you know exactly how much money you will need, a home equity loan could be a smarter choice. If you are unsure how much money to borrow and want to use the funds as needed, then a HELOC is the better choice. Either way, using both a HEL and a HELOC to pay for major expenses can make much more sense than using credit cards or a personal line of credit. The interest rate on the loan should be far lower than credit cards because you are using your home as collateral. Most credit cards come with variable interest rates of more than 12.9%, while the average rate on a HELOC is often significantly lower. This means you can end up saving big time on interest over the years. 

The interest you pay on the loan may be tax deductible. You are able to deduct the interest on a home equity loan or line of credit up to a loan of $100,000, according to the IRS. This is not the case with credit cards or personal lines of credit. When it comes time for a tax refund, you might be in for a pleasant surprise. 

Using a HELOC for Home Improvement

Many consumers use a HELOC for home renovations to help enhance the value of their home. The improvements will also make your home more enjoyable for your family. Consider how the project's cost compares with the potential increase in your home value. Some improvements offering the best bang for your buck may include: a minor kitchen remodel, a garage door replacement, a deck addition and converting an attic to a bedroom, according to Remodeling.com’s 2014 Cost vs. Value report. 

As with any loan product, always remember to factor in closing costs, the interest rate and the payment terms. It is important you shop around for the best rates and terms before making any decisions.

Of course, there is another significant reason why AltaOne members may want to consider a HELOC. From now through October 15, 2014, every new AltaOne HELOC qualifies our members for the amazing IMAGINE Sweepstakes, where you can win the Grand Prize of payments for a full year. 

Steve Nicastro, NerdWallet

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