Using a HELOC for Home Improvement: How It Works

Homeowners looking for funds to make home improvements or updates can tap into their home equity through a HELOC. 

Home equity lines of credit, or HELOCs, are great options for homeowners who may need access to extra funds when improving, renovating or remodeling their home.  

HELOCs work in two periods: a draw period and a repayment period. During your HELOC draw period, you have access to your HELOC funds while only paying interest on the amount you borrow.  

During your repayment period, you will need to pay back your loan principal and interest without being able to make additional draws. 

Looking for funds to make any planned home improvements? Apply for a HELOC today! 

How a HELOC for home improvement works 

Putting your funds from a HELOC toward home improvements is one of the best uses of your home equity. 

Some home improvements can take a while to complete, and other expenses could come up during the project. HELOCs allow borrowers to make additional draws if these expenses come up during the improvement process. 

With a HELOC, you are also able to access only the funds you need for your home improvements. This means that you won’t need to pay back any unused funds. 

Why use a HELOC for home renovations? 

There are many benefits homeowners see when using a HELOC for home renovations. 

Flexible access to funds 

HELOCs are a great option for home improvements because of the option to make additional draws when you need funds. 

Anyone who has renovated a space knows that additional expenses can arise during the process. If you have a HELOC, you have the ability to draw from your approved funds to cover unexpected or unplanned costs.  

Interest-only payment options 

One of the benefits many homeowners find with a HELOC is the interest-only payments at the start. 

When you are accessing funds on your HELOC, you will only need to pay interest on the amount you borrow. The principal on your loan doesn’t need to be paid immediately, giving borrowers some time to use their HELOC without worrying about paying back their loan amount. 

Potential tax benefits for qualified improvements 

Some home improvements made with a HELOC could qualify for tax benefits.  

The tax benefits won’t count for the entirety of your loan amount but could allow for tax benefits on any interest you pay on a HELOC used for certain improvements. Make sure you talk to a tax expert about any planned improvements or renovations and learn whether they might qualify*. 

HELOC requirements for home improvement projects 

Whether you are looking to get a HELOC for home improvement projects or any other expenses you may have, you will have to meet a lender’s requirements or qualifications. 

How much equity you need 

To qualify for a HELOC, you will need to make sure that the equity you have in your home is enough. Most lenders look for borrowers to have at least 20% home equity before qualifying for a HELOC. Some lenders will allow borrowers to get a HELOC if they have at least 15% equity in their home. 

Credit score and income requirements 

Similar to when you applied for your original home mortgage, your credit score and income are important factors in being approved for a HELOC. 

Most lenders will look for you to have a credit score between 600 and 640. The higher the credit score a borrower has, the better chance a borrower has to be approved. 

Lenders will also look to make sure that a borrower has consistent and stable income to ensure they can make monthly payments. 

Debt-to-income ratio guidelines 

Another major factor that lenders look at when determining if a borrower meets the requirements for a HELOC is debt-to-income (DTI) ratio. Your DTI ratio will tell lenders how much of your monthly income is committed to paying back previous debts. If you are looking to get a HELOC for home improvements, your DTI ratio should be no more than 50%. 

How much can you borrow with a HELOC? 

The amount borrowers are able to access through their HELOC is based on their home equity at the time of application. The maximum amount** HELOCs could be approved for is $750,000, while the minimum amount is $25,000.  

HELOC rates and costs for home improvement 

When considering a HELOC for home improvements or any other expenses, it is smart to consider what type of rate you would get and closing costs that could come with a HELOC. 

Variable interest rates explained 

Variable interest rates are an option not exclusively saved for HELOCs, as many loans could come with a variable interest rate***.  

When loans have a variable interest rate, it means the amount of interest a borrower will pay could vary according to where the market is. This can make predicting payments with a variable rate trickier than loans with a fixed interest rate. Many variable rate loans offer borrowers a lower rate for the first few years, which is what makes them an attractive option. 

Closing costs  

Similar to getting an original home loan, finalizing a HELOC comes with closing costs. These closing costs typically range from 2% to 5% of your total loan amount. Your closing costs cover lender, application, appraisal, underwriting and attorneys fees. 

HELOC vs. home equity loan for home improvement 

Like a HELOC, home equity loans allow owners to access a portion of their home equity for any expenses they may have, like home improvements. The main difference between a home equity loan and HELOC is how the funds are accessed and repayment.  

Home equity loans offer borrowers a lump-sum amount without the ability to make additional draws. Borrowers will also have to start paying back their home equity loan shortly after their loan begins.  

Pros and cons of using a HELOC for home improvement 

Borrowers could see benefits and drawbacks for any loans depending on their needs and situation.  

Pros 

• Only borrow what you need. 

• Don’t need to make immediate payments on principal. 

• Potential for tax breaks depending on your home improvements. 

Cons 

• Must pay closing costs. 

• Can only access funds during draw period. 

• House is used as collateral for your loan. 

How to apply for a HELOC for home improvement 

If you are looking to apply for a HELOC for home improvement, make sure you check requirements, plan out your renovations and start an application. 

When you are getting ready for a HELOC application, it is smart to make sure you meet all requirements set by your lender. After you have checked all the requirements, planning out your renovations can show you how much of your HELOC you will need to access. If you are hoping to get any tax breaks, make sure you talk to a professional and find out which improvements could qualify.  

When you have checked requirements and planned your renovations, you will be in a great place to start your HELOC application. 

*Owning does not provide tax advice. The consumer should always consult a tax advisor for information regarding the deductibility of interest and other charges in their particular situation. 

**Our loan amounts range from a minimum of $25,000 to a maximum of $750,000. For properties located in AK, the minimum loan amount is $25,001. Your maximum loan amount may be lower than $750,000 and will ultimately depend on your home value and equity at the time of application. We determine home value and resulting equity through independent data sources and automated valuation models. 

***The variable rate home equity line of credit (HELOC) is an open-end product where the borrower can withdraw funds and make interest only payments during the draw period. Monthly payments will increase to include both principle and interest payments after the draw period has ended. A minimum 90% of the total approved HELOC amount must be disbursed. The remaining 10% of the approved credit line can be drawn down later as needed during the draw period. The monthly variable interest rate is based on an Index, which is the Prime Rate published in the Wall Street Journal plus a fixed margin. This product is currently only available in Arizona, California, Illinois, Massachusetts, and New Jersey. The HELOC requires you to pledge your home as collateral, and you could lose your home if you fail to repay. Property insurance is required as a condition of the loan and flood insurance may be required if your property is located in a flood zone. Borrowers must meet minimum lender requirements in order to be eligible for financing. Available for primary, second homes and investment properties only. Property type, loan-to-value, and FICO restrictions and requirements apply. Dependent on minimum credit score and debt-to-income requirements. Occupancy status, lien position and credit score are all factors to determine your rate and max available loan amount. Not all applicants will be approved. Applicants subject to credit and underwriting approval. Contact Owning for more information and to discuss your individual circumstances. Restrictions Apply. 

Applicant subject to credit and underwriting approval. Restrictions apply. 

Information provided is for educational purposes only. It should not be construed as financial or legal advice or instruction. Owning does not guarantee or assume liability for the accuracy, completeness or timelines of the information. You should conduct additional research before making any mortgage related decisions.