HELOCs for dummies?

October 2, 2024 10:17 AM

I’m saving up for some expensive house projects and have a ridiculous amount of home equity. Should I just get a HELOC and get the work done instead of waiting?

Because property values are absurdly inflated where I live, I have a lot of home equity right now, at least until the bubble pops.

I’ve been saving up for some expensive house projects, most notably rewiring. Would I be smartest to just get a HELOC now and get the work done, or should I keep putting bits of money in savings and thinking long term?

I have good credit but little knowledge of how to “leverage my equity,” so feel free to talk to me like I’m stupid. Thank you!

posted by centrifugal to Home & Garden (13 answers total)

The downside to a HELOC is that you're paying interest on the money you borrow. But it's still cheaper than if you charged the balance on a credit card (unless you can get a new card with a no-interest introductory rate, and can pay it off before the rate increases.) If you save up, you'll pay no interest.

You can check with your bank to see if there are any fees to open the HELOC. If not, you could leave the line of credit open and use as needed.
posted by hydra77 at 10:42 AM on October 2 [2 favorites]

Look for sales. I got a HELOC last year and they gave us an introductory six-month rate, which definitely saved us some interest $$ on the initial chunk of money we used.
posted by Lawn Beaver at 10:49 AM on October 2

Here's how I would think about it
- how much will the project cost?
- how much extra (interest and fees) will you pay if you use the HELOC?
- how long will it take to save that much on your own?
- what would be the monthly payments on the HELOC? how confident are you that you can comfortably afford to make those payments for the entire length of the loan?
- what's the cost of waiting? is there a safety risk in waiting? how much does it improve your quality of life to have it done sooner?
- what's your financial safety net look like? if you urgently need money for another expense (say a tree collapse on your roof and you need to replace it urgently) do you have other sources of funds? (this could be increasing the amount of the HELOC)

I think if you know the answer to all of those questions then it will be clear what you want to do.
posted by metahawk at 11:15 AM on October 2 [6 favorites]

Would your total borrowing on the house still be less than 80% of the value?

Not your financial advisor...but I'm in the planning stages for a house project and looked at HELOC options. Despite having excellent credit, the HELOC rates quoted to me were pretty high*. Since my existing mortgage balance was very low (and not sub 3% rate), it made more sense for me to get a new first mortgage. I'll get the cash up front rather than drawn as needed, but I can get a decent rate putting it in T-bills or high-yield FDIC bank account for the next 6-9 months. The math mathed better for me this way versus keeping my low LTV mortgage and adding a HELOC.

Key to this was keeping the new mortgage below 80% LTV. If you have to borrow against the remaining 20% of your home's value, that's a different story.

*The government sponsored entities (Fannie, Freddie, etc) are the cheapest way to access financing for housing. but they don't do HELOCs (though Freddie has proposed offering 2nd mortgages). So you're outside of the most cost-advantaged pool of capital with a HELOC.
posted by mullacc at 11:22 AM on October 2

What hydra77 said. Paying interest is a bad idea overall.

Can you get a plain-old LOC from your bank? Compare those rates.

Most likely, your house is your largest asset. Now if you own somewhere where home prices are skyrocketing, HELOC is lowering your asset value. I have made more money in the three houses I have lived in, and bought, than I ever did from my jobs. OK, a bit of an overstatement.

We also have a super low interest rate, so refinancing is going to cost you some points I think. Those points are bad, negative VPs

And it depends if your house is going to burst into flames due to the wiring that is there. Depends a lot on how long it is going to take you to get the cash you need to do the work. Can you break it into chunks? Or is it one of those, "if we are going to tear up all this, you should probably do this..." situation?

And not knowing the amounts involved, it's hard to comment. Do the math
posted by Windopaene at 11:36 AM on October 2

One factor to consider is what the interest rate is on your HELOC vs. what the inflation rate is on home improvement projects. It might not be precisely cheaper to get the work done now vs waiting, but there's a cost to waiting that's more than just the danger or inconvenience of bad wiring.
posted by jacquilynne at 11:58 AM on October 2 [1 favorite]

I would talk to my bank about a line of credit which is better interest rate than a credit card and not tied to my house.
posted by St. Peepsburg at 12:25 PM on October 2 [3 favorites]

I will second what jacquilynne just said. We took out a loan to have an addition put on our house in 2018, and if we had waited to save up the money it would have cost us far more because of inflation than the total amount of interest.
posted by fimbulvetr at 12:26 PM on October 2

Electrical work is mostly labour, and trade labour prices are rising very quickly. Get the work done now.
posted by seanmpuckett at 12:33 PM on October 2 [1 favorite]

Also when you're talking to the Bank double check whether there are fees related to a creation of the HELOC (e.g., survey, title search, whatever). Also double check that after you pay off the construction charges you plan to pay via the HELOC and your balance becomes $0, is there a monthly or yearly fee for just holding the Credit Line for you (i.e., as opposed to someone else who WILL use it and then pay interest).

And on a real edge case, purely FYI and unrelated to your situation, I have an elderly relative who is in the RMD (Required Minimum Distribution) period of drawing down her retirement savings, and so she pays for everything thru her HELOC and then uses the monthly RMD deposit to pay her HELOC. I know, weird (but then again, maybe her tax preparer suggested it, I have no idea).
posted by forthright at 12:53 PM on October 2

I'll give you two more things to factor into your thinking:
- the chances you could experience a significant loss of income before you sell the house, and
- the possibility your home insurance could be cancelled/non-renewed

A recent check-in with my CFP led me to get a HELOC and those were the two things that tipped me. I'm mid-50s and have good income and home equity. However, if I lost my income, the likelihood of getting back into the job market at the same or better salary is not so good. Since I'm planning to sell my house before the HELOC repayment date, it made sense to leverage not just my home equity, but also my current income (which factors into your debt ratio), to ensure I had some backup cash on hand at a better rate than credit cards or other loans.

The home insurance issue has already arisen for me, and seems even more timely after Hurricane Helene in North Carolina. In 2021 I had some basement flooding because of a fluke - a dehumidifier shorted out on the same circuit as the sump pump and fried the sump pump right before a big storm, rendering it useless. My home insurance covered it at +$30k. Then in 2023 I had more flooding from a different cause. Even though they were two different causes, my agent recommended not submitting a claim for the second event. Their opinion was that multiple claims within three years would trigger higher rates or a non-renewal of coverage. Total repair cost was $17k, which I paid out of my emergency fund. If you live in an area susceptible (or becoming more susceptible) to events that may trigger home insurance claims, you might think about the HELOC as a first layer of home insurance before you submit claims, allowing you to "save" claims for something truly catastrophic. (Yes, I hate that this is the racket of home insurance, but here we are.)

Like you, my emergency fund was previously a "Save up and pay for repairs in full" fund. Now it's more accurately my "HELOC interest fund." While I'm in an earning phase, I'm shoring up in case I encounter a non-earning phase. That way, if I use the HELOC for anything (including to avoid the need to file a home insurance claim), I can pay off the interest in full each month.

Like you, I knew nothing about HELOCs a few months ago. A good friend who's a local RE agent was giving me some advice and mentioned them, and recommended a local bank they liked. I spent more than an hour talking to the loan agent there learning about their terms, then hit YouTube and just learned more and more little by little until I felt comfortable.
posted by cocoagirl at 1:27 PM on October 2

Right now, someone would pay 8-9% interest rate for a HELOC. Inflation is nowhere near 8-9% - it's closer to 2-3%. The argument to loan money at a low interest rate that could be approximately inflation or below inflation stopped applying in 2022.

That said, interest is not bad. It's merely the cost of borrowing money. Say your renovation costs $25K, and it would take you a year to save up $25K. If you used a HELOC at 8.5% interest to pay for that renovation now, and paid the HELOC off over the course of a year, you'd pay $1,165.93 in interest. That's a decently large cost, but you also get your renovation a year sooner.

Is $1,165.93 worth having the renovation a year earlier? That's a question for you.
posted by saeculorum at 6:58 PM on October 2 [2 favorites]

I have been told that you can borrow from your IRA or 401k using your house as equity. Would paying yourself that interest into those tax deferred funds help your savings goals?
posted by straw at 7:06 AM on October 3