How Can I Use a HELOC This Spring?
Your home can offer you not only a treasured family haven, but tremendous financial flexibility. A home equity line of credit (HELOC) allows you to draw from your home’s hidden value, and once established, you can draw from it as often as you wish, for whatever purpose and at a moment’s notice. You might decide to take a dream spring vacation or pay off some high-interest credit card bills – knowing you’ll pay interest only on the amount of your total credit line you withdraw.
But most people, in fact about half of single-family homeowners that obtain a HELOC, use the loan proceeds to make additions, improvements or repairs to their property, according to the U.S. Census Bureau. That’s probably the best use of such credit, and one that can offer tax benefits, too.
What are the most valuable home improvements?
In research conducted by Remodeling magazine, the average cost for 35 popular remodeling projects were compared with the value retained at resale in 101 U.S. cities. The home improvement that gained the most resale value over the past year was a back-up power generator, estimated to cost nearly $12,000 but recouping more than 67% of its cost. No doubt, our Polar Vortex winter had a hand in its popularity.
But the most valued home improvement is one of the most inexpensive: the replacement of an entry door. Estimated to cost just over $1,100, it retains more than 96% of its cost upon a home’s resale. Other high-return on investment improvements include:
- A wooden deck addition (recouping 87% of its cost)
- An attic bedroom (84%)
- A garage door replacement (84%)
- A minor kitchen remodel – defined as the addition of new appliances and countertops, and a facelift for existing cabinets, estimated to cost about $18,000 (83%)
- Window replacements (79%)
Other reasons homeowners get HELOCs
The Census information revealed many other reasons why homeowners get HELOCs, in addition to home improvements and repairs:
- Debt consolidation
- To purchase a vehicle
- To pay for education or medical expenses
- For investments
- To buy other real estate
Of course, there are no limitations as to how you use the proceeds, but when considering a HELOC, it’s important to remember that your home is being used as collateral for the loan. If you fail to repay, you could lose your home. That’s why it’s best to use HELOC funds for important matters – not day-to-day expenses.
How much equity can you tap?
In order to determine how much equity you have in your home that may be available in a HELOC, you’ll need to do just a bit of math. First, determine your home’s “State Equalized Value” (SEV). That is the amount municipalities use to calculate the taxes to be collected on your home. It is typically about half of your home’s estimated market value. So, double the amount – then multiply that by 80%. Subtract that from the balance of your first mortgage.
Let’s assume you owe $110,000 on your mortgage; here’s an example:
SEV = $100,000
$100,000 X 2 = $200,000
$200,000 X .80 = $160,000
Balance on mortgage = $110,000
$160,000 – $110,000 = $50,000
In our example, you would potentially have $50,000 in equity available for a home equity line of credit. That’s a substantial sum for springtime’s new beginnings. However, when determining your actual line of credit, the lender will consider your overall financial obligations, credit history and ability to repay the loan.
While HELOCs aren’t seasonal, with favorable weather and your new-found financial resources, it is an ideal time to tap a HELOC for home improvements.
Hal Bundrick, NerdWallet