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How a home equity line of credit can increase the value of a home

Date posted:  8/13/14 10:30:00 AM A HELOC paired with the knowledge of renovations that increase home value is a smart combination.

When a homeowner builds equity, he or she is able to use that home equity to access cash for whatever the individual deems suitable. This cash availability is called a home equity line of credit (HELOC) and it acts as a loan. 

If an individual wants to sell his or her home in the future, value can be added through renovations and upgrades. Fortunately, a HELOC can be used to fund these improvements made to a property. 

HELOC benefits 
According to Nerd Wallet, this type of loan is beneficial because the rates tend to be low and the interest on a HELOC is also tax-deductible. While this is appealing, homeowners should do the research to ensure this type of loan is the best option for them. 

The Wall Street Journal noted individuals can typically borrow about 80 percent of the value of their home with a HELOC, and this money can be used for everything from education to a total house renovation. 

Unstable income and inability to pay upfront costs to establish the HELOC, like attorney or application fees, are examples of when a HELOC is not the best decision. However, if homeowners are confident in their current and future finances, this is a great way to pay for large expenses, like remodeling or upgrades. 

Know what will improve a home's value
Being aware of what potential future homebuyers want to see in a home will help homeowners decide which renovations will provide the most substantial return on investment. This Old House noted a majority of buyers are interested in open floor plans, green efficiency and upgraded kitchens and bathrooms. 

Using a HELOC to fund renovations that complement these demands will help increase the value of a home and may ultimately allow the current homeowner to increase the home listing price when he or she decides to sell in the future. 

Applying for a HELOC
​Because a house serves as collateral when people apply for a HELOC, credit scores do not have as much of an impact on the approval of a loan. To gain access to a HELOC, homeowners will need to have their home appraised and provide verification of income. 

While the process is relatively simple, there are a number of fees associated with the application process. There might not be as many charges as there were when a homeowner applied for a mortgage, but the amount of money required to apply for a HELOC is an important consideration.