With a home equity line of credit (HELOC), you can tap your home’s equity for a variety of reasons, including funding home improvements. Plus, unlike a cash-out mortgage, you can typically tap a HELOC repeatedly. As you repay funds, they can be available for use again, not unlike how a credit card works. Based on the potential benefits, it’s common to wonder if now is a good time to take out a HELOC for home improvements. If that’s on your mind, here’s what you need to know.
HELOC Rates Are Low
Since HELOCs rely on home equity, their rates tend to mimic mortgage interest rates. Due to the Federal Reserve keeping interest rates down and HELOCs being a secured debt, interest rates on HELOCs are near all-time lows.
Additionally, while the Federal Reserve may not intend to move up interest rates in the near future, it will happen eventually. As the economy recovers from the pandemic, interest rates will inevitably rise. When that happens, HELOCs may be less attractive options.
Tax Implications of HELOCs
Using your HELOC for home improvements can actually result in a tax benefit. In some cases, you’ll have the ability to deduct your HELOC interest by making qualifying property improvements, something that adds another layer of value.
When interest rates are lower, this benefit is less dramatic. However, it is nonetheless there, so it’s worth factoring into the equation.
HELOCs, Home Improvements, and Property Value
When you use a HELOC for home improvements, you’re using your home’s equity in a way that may increase the value of your property. This can be a boon, as you may be able to boost the value of a critical asset.
However, it’s important to understand that the cost of certain home improvements doesn’t equal the value increase. For example, a minor, mid-range kitchen remodel may only recoup 77.6 percent of what you spend. For a mid-range bathroom remodel, that figure drops to 64.0 percent.
Now, lower interest rates can make the home improvements worthwhile even if you couldn’t recoup the entire cost in resale value increases. This is especially true if you intend to remain in your home, as the quality-of-life improvements could offset the financial losses.
Deciding If a HELOC Is Right for You
Ultimately, whether now is the right time to take out a HELOC for home improvements depends on your unique financial situation and overall goals. If your income is stable and the updates result in a substantial value increase or enhance your quality of life significantly, it could be worth considering. However, if you have unstable employment, would struggle to repay the amount borrowed, or wouldn’t’ get the value increase you’d hope for, you may be better off passing on this option.
Do you think that now is a good time to take out a HELOC for home improvements? Why or why not? Share your thoughts in the comments below.
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