Financing Home Improvements with a Home Equity Line of Credit
Smart Home Equity is your online connection for home improvement financing with HELOC equity credit lines and loans for construction and remodeling, with competitive fixed and variable rate home equity lending.
A home equity line of credit (HELOC) is a popular way to fund home improvements projects, like pool construction or remodeling, that increase your home's value. A HELOC is one of two types of home equity loans (second mortgages)--the other is a home equity installment loan (HEIL). The HELOC works much like a credit card. Your home is used as collateral to secure a line of credit from which you can draw money when you need it. This can come in handy for paying different contractors at different times and for financing ongoing remodeling projects.
Although home equity lines work a lot like credit cards, there are many advantages to opening a HELOC. For example:
The credit lines for a HELOC are generally much larger than those of credit cards, providing you with the money you need for your home improvement projects.
The interest rate is lower than that of credit cards, meaning that you pay less interest over the life of the loan.
Interest on credit cards is not tax-deductible. But, you can get up to 100% tax deductibility with home equity loan interest from your HELOC.
How a HELOC Works
The interest rate and annual percentage rate (APR) are calculated at the time you apply for the loan based on your credit score and the combined loan-to-value ratio (CLTV) of your home. The lower your CLTV is, and the higher your credit scores are, the better the interest rates will be on your HELOC. Unlike the HEIL, which is typically a fixed-rate loan, the HELOC is a variable rate loan with the interest rate being based on a publicly-available prime rate index and a lender-specified margin. The margin remains constant through the life of the loan, but the index will change (adjust) periodically depending on your HELOC's adjustment periods. For example, some HELOCs adjust after 6 months, and others remain fixed for a longer period of time.
During the initial years (draw period), you are generally only required to make interest only payments, and only when you draw money from your credit line. During this period, you can also pay down your principal balance and draw from the line again and again up to your credit limit. At the end of the draw period, the full balance is either immediately due or it is amortized and paid off over the remaining years. But, you can always refinance later after the home improvement project is completed and your home has appreciated, or convert the adjustable rate interest to a fixed-rate second mortgage which could save you quite a bit in the long run.