Should I Dip Into Equity and Renovate?

Many homeowners will be taking advantage of winter savings on supplies and the off-season availability of contractors to use a home equity line of credit (HELOC) to finance home renovations.

According to recent research from TD Bank, more than three quarters (80 percent) of responding homeowners with existing HELOCs who said they were planning home renovations for winter also said they would consider dipping into their home equity for funding.

With an average HELOC size of more than $84,000, half (51 percent) of those surveyed stated they plan to spend at least $50,000 on renovations as winter approaches.

Using a HELOC to make renovations during the winter is smart and cost effective, says Mike Kinane, head of Consumer Lending for TD Bank, as homeowners can often take advantage of reduced materials prices during annual sales and choose from a larger pool of contractors who usually have more accessibility during the off-season.

The most popular uses for HELOC funds, according to survey respondents were: home renovations (32 percent); emergency funds (14 percent); and education expenses (12 percent).

Realtor.com offers these six tips when considering a HELOC:

Shop around. Comparison shop to get the best rate.

Ask about the margin. If you’re offered a rate that’s lower than the competition, it’s probably just an introductory rate, so ask about the lender’s margin. For example, if the introductory rate is 3.5 percent and your lender’s margin is 2 percent, your final interest rate will be 5.5 percent.

Consider a conversion clause. Some HELOCs allow you to convert a variable interest rate to a fixed rate, usually during the draw period (5-10 years).

Watch out for balloon payments. Balloon payments mean that you must pay the balance in full when the draw period is up. Do not choose this option unless you have the financial means to handle it.

Create a family plan. Decide what the money will be used for and who will handle the funds. Keep in mind, you can lose your home if the HELOC is not handled properly.Create a payback plan. Come up with a reasonable plan for how the loan will be paid back.