Using Your HELOC for Renovations

Why Your HELOC Is an Ideal Tool for Multi-Phase Projects

When you decide to renovate your home, a lump-sum loan rarely fits the reality of the timeline. A Flexible Home Equity Line of Credit (HELOC) is ideally suited for multi-phase or ongoing projects because it functions like a revolving line of credit, much like a credit card, but is secured by your home's equity. This flexibility allows you to borrow, repay and borrow again as your project evolves over time and you only pay interest on the money you actually use.

HELOC vs. Home Equity Loan: The Key Difference is Flexibility

Choosing how to tap into your home's equity often comes down to two main options, but they serve very different needs:

The major advantage of your Flexible HELOC is its versatility. You don't need to know the exact final cost of your renovation to get started and you avoid paying interest on funds that are going unused.

The Renovation Reality: Why Staggered Projects Work Best with a Line of Credit

Renovations often do not go according to the initial plan and quote. You might start a bathroom remodel only to find a rotted subfloor or you might need to spread out your basement finishing project across two separate tax years when you find less time to complete the job than you expected. A Flexible HELOC excels in this environment because:

• Cost Management: You can draw $5,000 to pay the electrician and then draw another $10,000 three months later for custom cabinets. This matches your funding to your project’s actual financial needs and keeps you from spending money on unnecessary interest.
• Contingency Cover: If your contractor hits an unexpected issue, the remaining available line of credit is there to cover the surprise, saving you the stress of having to reapply for more financing.
• Lower Initial Payments: During the initial draw period, minimum payments often cover only the interest on the amount you've borrowed, keeping your initial expenses low while construction is underway.

Step 1: Set Your Overall Project Budget and Limit

Before applying for a Flexible HELOC, the first and most critical step is to define the scope of your total renovation and establish a maximum credit limit.

• Estimate Real Costs: Get quotes from contractors for the entire project (kitchen + bathroom + deck, for example) and add a 20% contingency fund for unexpected costs, which are common in remodeling.
• Determine Available Equity: Dependent on your personal situation and credit, lenders may provide a line of credit up to 80% to 85% of your home's appraised value, minus what you still owe on your primary mortgage.
• Establish Your Line: Apply for a Flexible HELOC limit that covers your total estimated project cost plus the contingency fund. This helps give you the financial flexibility you need.

Step 2: Accessing Funds Only When You Need Them

The Draw Period is the initial phase of your HELOC, typically lasting 5 to 10 years (though terms vary by lender). This is the time during which you can access the funds.

• How it Works: The HELOC functions like a credit card. You can borrow up to your limit, repay what you've used and borrow again, as many times as you need, until the Draw Period ends. You can access funds via checks, online transfers or your mobile banking app.
• Payments During Draw: During this phase, you are often only required to make interest-only payments on the amount you have actually borrowed. This keeps your monthly payments relatively low while you are mid-renovation.
• Pay Back Your Flexible HELOC Faster: While minimum payments may be interest-only, making extra payments toward the principal balance during the Draw Period is highly recommended. This reduces the total interest you pay and prepares you for the next phase.

Step 3: Understanding the Repayment Phase and Rate Lock Feature

The Repayment Phase begins immediately after the Draw Period ends. This transition marks a significant financial change that requires planning.

• The Shift: You can no longer withdraw funds. Your payments will typically increase substantially because you are now required to pay back both the principal and the interest on the outstanding balance, often over a new term of 10 years.
• The Rate Lock Solution: A key benefit of Ideal CU’s Flexible HELOC is the built-in Rate Lock feature. While most HELOCs have variable rates that change with the market, Ideal CU gives you the option to lock in a fixed rate on all or part of your balance anytime during the Draw Period. This feature is always available and helps you manage your payments with confidence.
  • Stability: When you lock in a rate for a specific project (e.g., locking $25,000 for your kitchen remodel at a fixed rate), you are protected from future rate hikes.
  • Flexibility: You can have multiple segments of your HELOC locked at different rates and terms while still having the remainder of your line available at the original variable rate.

Financing Smart: Tips for Avoiding Overspending

The line of credit flexibility can be a double-edged sword for those who struggle with financial self-discipline. This is hardly isolated to lines of credit, but it’s a good truth to keep in mind if you might be tempted to overspend. The most reliable defense against overspending in general is having a budget and sticking to it and that is true for HELOCs as well. 

Ready to Build Your Ideal Home? 

Using your home equity for improvements can be a smart investment that can increase your home's value while improving your quality of life. By choosing an Ideal Credit Union HELOC with our Rate Lock feature, you gain the perfect balance of low interest rates, flexible access and predictable monthly payments.

Start your renovation journey with confidence: Apply for your Ideal Credit Union HELOC today!