Do you have several home improvement ideas that you’d like to make a reality over the next 10 years or so? Perhaps you’d like to replace old windows or appliances, and your bathroom needs a facelift. Afterwards, maybe you’d like to put an addition on your home with a master suite. A home equity line of credit (HELOC) is a type of home improvement financing that is well-suited for multiple projects completed over many years. Learn how you can use a HELOC to pay your home improvement costs.

HELOC (Home Equity Line of Credit) Basics

A home equity line of credit (HELOC) is a loan that allows you a line of revolving credit, secured by the equity in your home. Here are some important facts about HELOCs:

• Closing costs and annual fees apply.
• Just like a credit card account, you’re approved for a certain credit limit.
• You only borrow what you need, as you need it.
• You only pay interest on the amount you borrow, not your entire limit.

HELOCs versus Home Equity Loans

HELOCs are sometimes confused with home equity loans. While they are similar, there are some differences between these two methods of home improvement financing:

• With a HELOC, you only must pay interest on what you owe. A home equity loan gives you one lump sum, paid back over time.
• With a HELOC, you borrow only what you need for each project during a specified time period, and you only pay interest on this amount. A home equity loan must be borrowed in total.
• With a HELOC, interest rates are variable and based on your average daily balance, the prime rate and the margin your bank or lender has determined for you.

Draw and Repayment Periods of a HELOC

A typical HELOC has a term of approximately 20 years, usually divided into two periods:

• Draw period: During the first five to 10 years, you can borrow as much and as often as you would like during this time, as long as you’re within your credit limit.
• Repayment period: During the next approximate 10 to 20 years, the borrowed amount and interest must be repaid in full. The balance is often divided into monthly payments, sometimes with a large “balloon” payment at the end.

Some home equity lines of credit do not have a repayment period. In these cases, the full amount is due at the end of the draw period.

Advantages of a HELOC to Pay Home Improvement Costs

If you finance your home project with a HELOC, you’ll enjoy these advantages:

• Freedom to borrow only how much you need and when you need
• Interest-only option
• Low fees
• Lower interest than fixed-rate loans or credit cards
• No prepayment penalty.

Disadvantages of HELOC Home Improvement Financing

If you are considering a HELOC, be aware of these disadvantages:

• Adjustable rates with possible rising payments due.
• Early closure fees
• Minimum draw amounts
• No caps on interest rates.

As a worst-case scenario, because HELOCs are secured by your home equity, you could lose your home if you are unable to pay your loan.