How a HELOC works for home renovations
Las líneas de crédito sobre el valor acumulado de la vivienda funcionan como una tarjeta de crédito personal. Para comenzar, un prestamista le otorgará un límite de crédito basado en el valor acumulado de su vivienda. Durante el “período de retiro” inicial, solo pagará intereses sobre el dinero que realmente use. Cuando finaliza el período de retiro, usted realiza pagos mensuales amortizados regulares hasta que se pague la deuda.
Caution should be taken when considering a HELOC. Many HELOC programs have balloon payments due and payable in full at maturity. This means that the remaining balance must be paid or a new loan taken out to refinance the remaining balance.
RELACIONADO: ¿Qué es una HELOC?
Homeowners can use a HELOC as a flexible way to cover a series of smaller home renovation expenses, which can be particularly helpful if you’re not sure about the final cost of your project. A HELOC can also work well if you are expecting a large lump sum payment, bonus, commission, or gift that you can use to repay the HELOC as you go.
Ventajas de HELOC
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Line of credit, not a lump sum
Even if you set a budget for your home renovations, it’s not often that your final costs match your initial estimates. A line of credit may make more sense for these types of projects, giving you the flexibility you need to meet the costs of each phase of the project.
A HELOC can be advantageous when you need to cover the costs of different project phases or variable costs such as materials or contract labor.
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Line of credit stays open until term ends
A line of credit can be used repeatedly during the initial draw period. You will need to pay down or pay off your balance to reuse the line of credit, much like a credit card.
Typically, the draw period lasts for five to ten years, during which time your HELOC generally provides flexible interest-only payments or very low payment options. Some lenders offer draw periods that go considerably longer, but most home renovation projects are completed quickly enough for a standard HELOC.
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Depending on your lender and your financial history, you may qualify for a HELOC that offers interest-only payments during the initial draw period. This means that you’ll only repay the interest on the money you borrow, not the actual principal.
While you can repay the principal without being penalized, in order to reuse this line of credit, you won’t be required to repay the principal until the interest-only draw period ends. After this, you’ll make both principal and interest payments during the repayment period.
A HELOC option can be an advantage if you’re making improvements to sell your property since you’ll use the profits of the sale to repay the loan.
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Tax-deductible interest
Si utiliza una HELOC para aumentar sustancialmente el valor de su vivienda, el interés que paga puede ser deducible de impuestos. Puede deducir el interés hipotecario de la vivienda sobre los primeros $750,000 ($375,000 si está casado y presenta una declaración por separado) del endeudamiento. Sin embargo, se aplican limitaciones más altas ($1 millón ($500,000 si está casado presentando una declaración por separado)) si está deduciendo intereses hipotecarios del endeudamiento incurrido antes del 16 de diciembre de 2017.
Just be aware that to claim this benefit, you must itemize your tax deductions, though this can still be a helpful way to improve your home while reducing your tax burden. Check with your tax professional to ensure that you meet all guidelines.
Desventajas de HELOC
Despite the advantages, you might need to be cautious about using a HELOC for home renovations. While none of these drawbacks are insurmountable, they may require additional planning and preparation to navigate.
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Variable interest rate
Una HELOC ofrece una hipoteca de tasa ajustable (ARM), lo que significa que la cantidad exacta de interés que pagará cada mes fluctuará durante la vigencia del préstamo. A diferencia de la previsibilidad de una hipoteca de tasa fija, una tasa de interés variable significa que los prestatarios deben dejar un poco de espacio para respirar en sus presupuestos mensuales para adaptarse a los costos de pago cambiantes.
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Payments increase once interest-only period is over
After the interest-only draw period is over, you’ll be required to make regular monthly principal and interest payments. This means that the shorter repayment period will result in higher payments since you’ll be paying the principal as well as any remaining interest over a shorter remaining term of the loan.
If you failed to keep track of how much you were using during the draw period, you could be in for an unwelcome surprise when it comes time to repay the money you’ve been using.
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Line of credit is secured by your home
Cuando utiliza una HELOC, su propia vivienda se convierte en la garantía del prestamista. Si no realizas los pagos, podrían dar lugar a un incumplimiento en tu préstamo. No solo puede dañar su historial de crédito y su puntaje de crédito, sino que también corre el riesgo de perder su vivienda en ejecución hipotecaria.
Other home improvement financing options
Other available options that you may want to consider are a cash-out refinance or, for a much larger project, a renovation loan.
- A cash-out refinance is a refinance of your existing home loan and converting the available equity into cash in hand. If you are choosing this option, you will be making principal and interest payments for the life of the loan and you will need to manage the disbursement of the funds from your personal account where you deposit the loan proceeds.
- A renovation loan is a convenient and economical means for borrowers considering home improvements for repairs and full renovations. This is a single close first mortgage that enables the purchase or refinance of a home in need of repairs AND includes the necessary funds for the renovation. Renovations must be completed within 12 months of the note date. The minimum renovation loan amount is generally $100,000.
Renovation HELOC
CrossCountry Mortgage proudly offers a renovation HELOC. With access to flexible financing, you can make renovations that increase your home’s overall value or create the kitchen or bathroom you’ve always dreamed of.
To learn more, contact the experienced team at CrossCountry Mortgage today. We can evaluate your financial history and home equity to connect you to the financing option that fits your goals and budget.
