5 ways to make the most of your home equity line of credit

  • March 11, 2020

If you’re a homeowner, you may have access to a significant amount of cash and not even know it. We’re talking about home equity, which is at an all-time high. 

Home values have risen consistently the past eight years. In fact, the average homeowner gained $5,300 in home equity from 2018 to 2019 alone.

Home equity loans aren’t just for people who have lived in their home for decades. New homeowners may also be accumulating equity quickly due to the rapid rise of neighborhood home values.

You can tap into your home’s equity value without selling your home by using a home equity line of credit (HELOC).

What is a home equity line of credit?

Your home equity is the part of your home that you “own.” It’s the difference between what your home is worth and what you owe on your mortgage. A home equity line of credit is a loan, similar to your mortgage, but works more like a credit card. Similar to a credit card, you borrow and repay funds as needed. There’s no need to re-apply each time you need cash, and you only make payments when you have an outstanding balance.

Unlike a credit card, your home serves as collateral for the loan. HELOCs typically come with lower variable interest rates. Credit limits are calculated using your home equity, which is the difference between the market value of your home and the mortgage loan balance.

The flexibility of a HELOC allows you to do more than fund a major remodeling project. Let’s take a look at a few ways you can make the most of your available equity:

1) Increase your home’s energy efficiency.

An energy-efficient home can save money by lowering utility bills. You might also be eligible for federal tax credits, personal income tax deductions, or other incentives and rebates. Even if you’re not interested in obtaining a Missouri Home Energy Certification, you can still benefit from energy-efficient upgrades to windows, HVAC systems, or alternative roofing. These improvements can also mean more money at the time of sale. For example, homes with solar panels sell for 4.1% more than comparable homes without solar energy. Be sure to weigh out the cost and benefits, as there are many home energy improvements available at a variety of price points.

2) Upgrade your home’s features.

There’s a lot to consider when making upgrades to your home. Are you looking to increase the value of your home or make it more attractive to potential buyers? Maybe you’re more concerned with what updates you’ll enjoy the most while you live there. Often, it’s a combination of both goals.

When thinking about using a HELOC to pay for home upgrades, know that some projects have a higher rate of return than others. According to the 2020 Cost vs. Value Report, two projects consistently allow homeowners to recoup the most money: manufactured stone veneer and garage door replacements. Sellers can expect to recoup approximately 95% of the cost of each replacement at the time of sale.1

Those numbers do change a bit when you look specifically at the West North Central region, of which Missouri is a part. In that case, a minor kitchen remodel is at the top of the list, with 74% recouped. Manufactured stone veneer and garage door replacements are in the next two spots at around 60% each.

That major kitchen remodel or master suite addition you’re dreaming of may not allow you to recoup as much of your money at the time of sell. You can expect more like 40-50% for those upgrades. Though, that may still be worth it to you when you’re cooking in your beautiful new kitchen. Only you can answer that.

If you use a HELOC to pay for home upgrades that don’t offer as high a rate of return, you may want to consider how long you plan to live in your home. If you’d still be paying down a HELOC on a renovation that only recouped half of your money, you may not find yourself in the best financial situation when you sell.

3) Add living space to your home.

Feeling cramped in your current home? A HELOC may allow you to expand your livable space in your current home instead of buying a new home. If you have an unfinished basement or attic space, finishing them off may give you the space you need. If you’re feeling really ambitious and space allows, you may consider a larger project like expanding your home up or out. Start with setting a budget and selecting a good contractor to look into all of your options.

4) Buy or build a vacation home.

Looking to make a home away from home? The equity in your primary residence can provide the cash you need to purchase a second home. Borrowers can use a HELOC to pay for an additional home and may even receive tax benefits2 in the process.

5) Pay off high-interest rate credit card debt.

If you’re dealing with credit card debt, you may consider a HELOC as a possible solution. Typically, HELOCs have a lower interest rate than credit cards. Paying off high-interest cards with a HELOC can help you pay down debt faster and save money in interest.

As you can see, there are few limitations on how you use your funds from a HELOC. The important thing is to decide if this financial tool is right for you. Many financially savvy people use a home equity loan in place of other higher interest options. However, it’s very important to remember that you’re using your home as collateral.

Be especially cautious if you’re using a HELOC to pay off other debt. It can be a smart move, but you must be sure to follow a debt repayment plan that includes more than making minimum payments. Since a HELOC uses your home as collateral for the loan, paying off your balance quickly makes good financial sense. It’s worth repeating, falling behind on payments can put your home at risk of foreclosure.

Use the equity in your home to meet your financial goals on your terms. The Bank of Missouri offers HELOCs with competitive terms.3 Apply online, call us at 888-547-6541, or visit one of our convenient branch locations to start your application today!

1 2020 Cost Vs. Value Report, National Averages.
2 Consult with a tax professional for guidance.
3 Subject to credit approval. The property must meet lender eligibility requirements.