If you borrow money to remodel or make repairs to your home, your bank may approve a home equity line of credit (HELOC), allowing you to withdraw funds when you need them. A HELOC is an interest-only loan that requires you to make a monthly payment on the amount of interest accrued monthly. A home equity line of credit is usually temporary, ending when all the money is spent or when the loan matures to a predetermined date, such as six months, 12 months or longer. At that point, you will repay the money or refinance the HELOC.
Step 1
Look for a loan with a fixed rate when interest rates are low. In general, your HELOC interest rate is higher than the rate you can get with a conventional loan. If you can't repay the HELOC, the bank will roll the amount owed into an installment loan and you will make monthly payments.
Step 2
Consider an adjustable rate loan only when the interest rates are high. In this situation, the bank will allow you to pay a lower temporary interest rate that will increase after a set time, usually in a year or two. If you know that you will pay off the loan before the interest rate changes, you can save money with an adjustable rate loan.
Step 3
Remortgage your home and include the amount of your HELOC. If you used the money from the line of credit to remodel or make repairs, then you've added to the value of your home and refinancing your mortgage makes sense. However, if you used the money for a car, a vacation, a big-screen television or other personal expenses, don't jeopardize your home mortgage by including expenses that do not hold their value.
Tips and Warnings
- Unless you have a substantial amount of money owed in your HELOC, it may not make sense to remortgage your home to include the amount if closing costs are higher than the money you will save. If you purchased consumer items with your HELOC, try to get an unsecured loan instead of attaching the loan to your home. Talk to an accountant about the tax savings you will realize if you refinance your mortgage to include your HELOC. Interest on your home mortgage is deductible, but interest on a consumer loan may not be.
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