Time for a remodel? Consider a home equity line of credit

Home prices have gone up dramatically in the last few years. If you’re in the market to upgrade, it’s been a challenge to find a house and negotiate for one. Hot housing markets make for competitive bidding and many houses are being sold before they hit the market for longer than a day or two.

If your current home isn’t exactly your dream home, but you have visions for it — it’s a good time to consider a renovation. Costs are going down, and contractors aren’t as in short supply like they’ve been. And, if you feel adventurous and decide a DIY route suits you best, there are loads of tutorials you can find online to help make the project become a reality.

How to pay for an update? If your cash is wrapped up in other things and you want to shy away from using credit cards, you may want to consider a home equity line of credit.

A home equity line of credit (or HELOC) is a loan that takes the value of your house and puts it to work for you. Let’s say your home’s value is $200,000 and your current mortgage balance is $125,000, you would have $75,000 in equity. Most lenders allow you to use between 80% and 100% of that equity for whatever you wish. Many people use it to finance education and consolidate debt. By far and away, the most popular use of a HELOC is to finance home repairs and upgrades.

Like a traditional mortgage, the interest you pay on a HELOC may be tax deductible (speak to your tax professional). Drawing on the available line of credit works much like a credit card — you can advance an amount, pay it back, and have that amount available for you to draw on once again.

Most home equity lines of credit let you draw on the line for 5 to 10 years before you enter a repayment period. During the draw period, most lenders require you pay at least the interest; some break the payments down into a more traditional loan payment structure of principal and interest.

Rates on HELOCs are usually adjustable — meaning the rate can change. Most change annually and there is usually a limit as to the maximum it can change one year to the next.

As far as the application process, there will be more information needed versus a less complex loan, like an auto loan. You’ll need paystubs, income taxes, proof of homeowner’s insurance, and, in some cases, a real estate appraisal to determine the current value of your home. In some cases, a lender might rely on your tax statement for the home’s value or a home evaluation instead of a full real estate appraisal.

Using the equity in your home can be a savvy way to update your home and increase its value further. Shop around for the best rates, closing costs, and lender terms to get a home equity line which works best for you, your financial situation, and your projects!

Annie Lepper is vice president of operations/marketing for Minnesota Power Employees’ Credit Union (MPECU).