Question:

My wife and I have been thinking of doing some renovations to our home we purchased 8 years ago. We know that a home equity line of credit is a great option, but don't know where to start or how it works.

Answer:

First off, what is equity? Equity is the current value of your home less the total mortgage balance(s) remaining. This can be a large amount of capital that contributes to your net worth, but it's not straightforward on how to access it. In short, you have three main choices to access the equity in your home.

1. Sell the home and take your proceeds

2. Pay off your current mortgage(s) via a 'cash out' refinance with a new larger loan and take the difference in cash

3. Get a Home Equity Line of Credit (HELOC)

- Option 1 is not applicable to the question asked.

- Option 2 is not a great option for most, because a refinance would mean trading a historically low interest rate for one in the 6.0s.

- Option 3 is the best option for most. Banks/credit unions have great options for HELOCs. This would be a second mortgage, separate from your current mortgage. You'd apply, qualify, and pay for this new line of credit just like you did for your initial mortgage, but the process is significantly more streamlined and less expensive. Below is an example.

2017 - Home purchased for $200,000 with mortgage of $190,000

2025 - Home worth $300,000 with mortgage balance of $160,000.

Equity in this example is $140,000 ($300,000-$160,000)

You can apply for a HELOC from a bank/credit union for a portion of that $140,000. Typically banks cap your total mortgages at 90% of the current value, so in this example you could get a line of credit for $110,000 ($300,000 x 90% - $160,000). The great thing about a line of credit is you only pay interest to the bank/credit union on the money you actually draw. You're not required to take all $110,000 and pay interest on it from day 1. It's flexible.

Let's assume you took out a total of $50,000 from the HELOC to do what you wish. You don't have to use this money on your house. You can use it to pay off credit card balances, children's tuition, wedding, or anything else that's most important to you.

$300,000 current value of your home + any potential new value created from renovations/improvements completed on your home

$160,000 first mortgage with a payment of $800/mo (remember, this loan is completely unchanged)

$50,000 second mortgage (HELOC) with a payment of $300/mo

Two last items to note.

- HELOCs are almost always variable interest rates NOT fixed.

- After a period of time (10 years in many cases), banks/credit unions will close the HELOC and require you make a new regular payment on the money you borrowed. This new payment will now include both interest AND principal, so you start paying down the balance on the money you borrowed.

- Jeff 8.12.25