The real estate market is healthy, and homeowners are taking advantage of the strong housing prices to make renovations to their properties. Many homeowners are using equity financing like a home equity line of credit (HELOC) to afford renovations that add home value before selling to maximize profits.
What is a Home Equity Line of Credit?
A HELOC is a revolving line of credit that can be withdrawn from as many times as a homeowner needs during the draw period (which typically lasts up to 10 years), where the total borrowing is repaid during a subsequent repayment period (usually ranging from 5 to 20 years).
As the borrowing is secured by lenders through the value of the home, HELOCs often feature high borrowing limits that can finance home renovations, updates, or reconstruction.
Why Use a HELOC for Renovations?
When trying to sell a property, evaluate what nearby homeowners have done to maximize their sale price:
Was the home renovated before sale?
How did that choice of renovating or not renovating impact the selling price of the home?
In strong real estate markets (as in 2022), buyers want houses that are in near perfect condition and are willing to pay more for a turnkey property. In this market, investments in renovations that increase the home’s value can be recouped through the sale price.
For this reason, many real estate investors use HELOCs to make renovations on properties that they plan on flipping because HELOCs allow them to withdraw from a line of credit that can fluctuate with contractor bills over the course of the project. If the initial amount withdrawn from the HELOC isn’t enough, they can go back and draw more as needed.
As the property is renovated within the 10-year withdrawal period, a borrower needs only to repay the HELOC’s interest. Once the property sells, the HELOC (and any remaining mortgage) are paid off, with the remaining profits going to the homeseller.
How to Evaluate if a HELOC is the Best Option
Investors aren’t the only ones able to use a HELOC to their advantage. A homeowner that is looking to trade up in property to something better suited to their current lifestyle or those looking to downsize after the kids have gone off to college are able to use HELOCs to get their home ready to sell.
Choosing what repairs to make to the home to give the highest resale value with the lowest cost is the key to using the funds wisely and walking away with the highest profit from the sale.
HELOCs Are a Great Renovation Tool
Using a HELOC is an effective way to fund home renovations before a sale without having to come up with cash to afford your updates. With a HELOC, you can use only what is needed (rather than taking out a lump sum at the start of the project) and only repay what you need to withdraw.
Most HELOC lenders allow homeowners to pull up to 80% of the home’s available equity, giving homeowners the borrowing power to fund their updates. Additionally, HELOCs can offer interest-only payments until the renovations are complete and the house is sold, which maximizes profits while reducing stress.