Pros & Cons of Using a HELOC for Home Improvement

April 28, 2023 | Modified: August 28, 2023

Home equity lines of credit (HELOCs) have always been a great option for homeowners looking to take advantage of the equity in their homes for home improvement projects. A HELOC enables a borrower to draw down on the line of credit as they need the funds, rather than borrowing one lump sum. This helps to keep both monthly payments and interest payments down to a minimum. Read on to learn some of the pros & cons of using a HELOC for home improvement.

6 Pros of using a HELOC for home improvement

1. HELOC rates are typically lower than home equity loan rates, personal loan rates, and credit card rates.
2. You can borrow only what you need when you need it. While a traditional home equity loan provides a lump sum of money, a HELOC enables you the flexibility to borrow as needed up to a fixed amount. In simple terms, it is an open line of credit. You could potentially have access to cash for years based on the amount remaining on your line. As an added bonus, you only pay interest on what you actually borrow from the line. Some lenders spread the repayment period out, while others require a balloon payment. Because you can borrow what you need when you need it with a home equity line of credit, it’s ideal for home improvement projects or remodels that are completed over time.
3. HELOC interest is tax deductible if you use funds from the HELOC for certain home improvement projects. According to the IRS interest payments on home equity loans are deductible only if they are used to “buy, build, or substantially improve the taxpayer’s home that secures the loan.” The loan must be secured by the taxpayer’s main home or second home (qualified residence), and not exceed the cost of the home and meet other requirements. Speak to your tax advisor if you have any questions about the tax deductibility of interest on a HELOC.
4. Borrowers opting for a HELOC may have access to a larger amount of money than other loans based on the equity in their homes.
5. Another key point, a HELOC may provide you with a number of flexible repayment options based on the lender you select. HELOCs come with a draw period, which is a pre-set period of time during which you can draw funds. When the draw period ends, you focus on paying off the full amount of the loan. A perfect example of flexibility in repayment is Benchmark FCUs Ultimate HELOC.  The Ultimate HELOC provides borrowers with two great repayment options. They include principal and interest or interest only. Tap to learn more about the Ultimate HELOC.
6. A HELOC has the ability to positively affect your credit score when all payments are made regularly and on time. Tap to learn how a HELOC can impact your credit score.

5 Cons of using a home equity loan for home improvement 

1. The first consideration when contemplating using a home equity loan for home improvement is understanding that it is a secured loan and that your home is used as collateral for the loan. It’s important to realize that not paying your loan can put your property at risk of foreclosure.
2. HELOCs have a variable interest rate that may fluctuate over time. While traditional home equity loans are fixed, HELOCs are variable.
3. Borrowers must be aware that their monthly payments can fluctuate based on the interest rate changing.
4. Certain HELOCs may have prepayment penalties.
5. Finally, some HELOCs may also come with high or ongoing fees.

Find a great HELOC lender

HELOCs can be the wise option for home improvement and renovations if you are disciplined with making all of your payments on time. It’s an effective way to borrow the funds you need at a lower interest rate than using a personal loan or credit card. Shop around for a HELOC lender who offers a competently low rate and terms that work for you. Include Benchmark FCU’s Ultimate HELOC in your comparison. Benchmark is currently offering a 3.99%APR* introductory rate for 6 months, in addition to other perks for borrowers.

Need some home improvement project ideas? Read our blog “Home Improvement Trends for 2023.”Disclaimer

Learn more about HELOCs in our blog “Are HELOC rates fixed?”

*APR = Annual Percentage Rate. Rates are for qualified borrowers and are subject to change without notice. The introductory rate of 3.99% APR is for the first 6 months. At the end of the introductory term, the rate reverts to rate according to credit score at the time of application: as low as Wall Street Journal Prime Rate – .51% for 80% LTV** and Wall Street Journal Prime Rate – .26% for 81-90% LTV**. The floor rate is 3.99% APR. $100 application fee for loans under $25,000. Early termination fee of $250 if HELOC is paid off & closed in the first 12 months.  $100 cash bonus for acquiring a new or refinancing a HELOC held at another institution & will be deposited into the member’s account after loan closing.  Promotional bonus & rate are subject to the institution’s discretion & may be discontinued without prior notice.