When to take out a HELOC loan and when to pay cash for home improvements.

We have a credit score of 750 +, have cash in the bank and have a home equity loan (no balance) for a tax deduction. We want to spend $5,000 on home improvements. Should we use a home loan and pay it off early to improve our credit score, or just pay cash? Do home equity loans expire if you don’t use them?


Hello Rick and thank you for your question:

Rick, there is nothing that you need to do to improve your credit score and I would never recommend that you get into debt to do so. A 750 credit score is excellent and will afford you the best interest rates on any loan so there is nothing else you need to do in that regard except to continue making your payments on time!

In terms of this HELOC, I am going to take a moment and correct you here; you have a home equity line of credit, not a loan. I want to be accurate in the language here. It is a line of credit that is attached to and based on the equity in your home. Since the home collateralizes the credit line, the interest rate is typically far lower than what you would get with a credit card, but if you default, your home could be at risk.

I am all for improving your credit score, my concern here is that in using the HELOC you will now be paying interest on a sizable balance and for no reason. You have the funds to pay for the improvements. Individuals that have used their home equity lines of credit have done so when there wasn’t any money to pay for necessary repairs like the water heater suddenly going out or needing to replace the furnace.

Terms can vary, but let’s take a look at this possible scenario:  You use $5,000 and the interest rate is 6% if you want to repay it within 12 months the monthly payment could be about $430.00. That is a sizable monthly payment that you don’t have to take on.  By doing this, you are now creating another bill and since no one can see into the future, what if something were to happen and you could no longer make the payments? Job loss, unexpected illness, or other unforeseen circumstances can happen. I say just pay for the improvements and be done with it. That way you know that it’s paid for, you have not created another bill, and you are not paying that interest!

To your other question, home equity lines of credit have a draw period, which is the time period that you have to use the funds. Once the draw period expires, you will not be able to access any more of the funds and you will have to repay the amount of money you took out. I would advise you to read your terms very carefully. Also, just because you are approved for a certain amount does not mean you have to use all of it.

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