Financing Your Home Improvements Home  Next >         Is a Home Equity Line of Credit Right for You? Do you want to expand your cramped kitchen or upgrade your bathroom? If you would like to tackle a home improvement project but you're worried about costs, you might consider taking out a home equity line of credit (HELOC). A HELOC is a financial tool that offers you revolving credit based on the equity in your home. Unlike a closed-end second mortgage where you have to pay interest on the loan from the beginning, with a HELOC, you only pay interest on the amount of money you actually draw from your line. HELOC's offer more flexibility on your borrowing timeline as well, since they provide a window for using the funds, then followed by a repayment period. Interest rates might be low right now, but that can change. Interest rates for a HELOC are usually lower than rates for unsecured loans or credit cards. Additionally, a portion of the interest payments may be tax deductible. But note that interest rates can change. David Reiss, a law professor at the Brooklyn Law School who specializes in real estate and lending, explains that borrowers often don't realize the impact that these rate changes can have, so it's a good idea to have some margin of safety when it comes to paying their home equity lines of credit. The "home equity" part of HELOC matters. While your interest rates can vary based on time and loan provider, your HELOC's maximum value is set by how much equity you have in your home. The maximum credit banks or other lenders will offer homeowners on a HELOC varies, but it is often capped at an amount that will leave you with at least 10 percent equity in your home. So, for example, if your house appraises at $300,000 and you have a first mortgage of $180,000, you currently have 40 percent equity in your home. Therefore, a bank may give you an equity line of up to $90,000, which would bring your equity down to 10 percent of the appraised value. Consult a banker or mortgage lender. A HELOC is not the right choice for everyone. To find out if it is an option that meets your needs, speak to a loan officer. The loan officer will ask you about your financial goals. Anthony Humpage, CEO of Legacy Education Alliance Inc, which owns the Rich Dad Education Seminars, says that borrowers must do their due diligence to find the best loan for their situation. "Refuse to accept early repayment penalty clauses and, if you don't understand the mortgage deal being offered, it isn't right for you," Humpage says. Smart ways to use a HELOC. When it comes to using your HELOC, Humpage strongly suggests thoroughly investigating the expected return on investment of any renovation before you start committing large amounts of money to it. "It may not add the value you think," he warns. If you are looking to make a major capital improvement on your home, a HELOC can be a smart way to obtain sufficient funds to complete it on your preferred schedule. Or if you live in a fixer-upper home that has a laundry list of needed renovations, a HELOC may be your best bet to tackle them all. "A home equity line of credit can be useful if you are doing projects over time, as you can draw on it when you need to," Humpage points out. Using a home equity line of credit can be a great way to fund your home projects. You can proceed at your own pace, and only pay interest on the money you've borrowed. Consider the long-term risks and rewards, and talk to a mortgage expert to determine whether a HELOC is right for you.   ©2015 TCF National Bank. Member FDIC. tcfbank.com This publication does not constitute legal, accounting or other professional advice. Although it is intended to be accurate, neither the publisher nor any other party assumes liability for loss or damage due to reliance on this material.