I Used a HELOC for My Fixer-Upper, and It Was Great—for a Little While

When you manage to buy a big, old Victorian for a steal, you know a time will come to pay the piper. My husband and I managed to do the first few projects on our 1887 home in Old Louisville with savings and proceeds from selling our other house. But when it came time to replace the roof, update the nightmarish bathroom, and bring the kitchen into this millennium, we ran out of funds.

The good news was that all of the improvements we’d made had increased the value of the house, so we had options for borrowing money. We looked at a few ways to do that, including a home equity loan; just a straight-up loan against the equity in the house; a home equity line of credit, also known as a HELOC, which is operates like a revolving line of credit you take out as you go; and a cash-out refinance, where you re-do your entire mortgage for a larger amount than you owe and keep the difference.

Because our house presented some complications, we ended up taking the more flexible HELOC route. We Airbnb part of our home, and a lot of lenders are very stand-offish about that. They call it a “bed and breakfast property” (even though I argued fiercely that my short-term rental license is not the same thing) and lenders told us Fannie Mae policy doesn’t allow loans on that type of property—which is not necessarily true—so a lot of doors were shut. There was also the question of whether our house was a single family residence or something else. The attached garage and apartment have a different address than the main house, and, inexplicably, the back door to the house has yet a third address. These are the mysteries you encounter when you buy a sprawling 130-year-old property.

We did similar paperwork to a typical refinance or mortgage, filling out an online application, providing loads of proof that we have enough income and savings, along with all the details on our existing mortgage. 

HELOCs can be more flexible than other loans, and ours didn’t require anyone to visit the house to appraise it. The lender did something called a “desktop appraisal,” where they look at nearby comparable sales and literally drive by our house to come up with a value on our home. 

The amount you can borrow depends on your “loan to value” ratio, and the more your house is worth than what you owe on your current mortgage, the more you can borrow and the better rates you’re eligible for. Our house had increased enough in value that we were able to take out money to replace the roof as well as redo the kitchen and bathroom. 

In fairly short order we were approved, and the lender gave us access to our sum in an account at their bank, with paper checks and electronic access. We didn’t have to take it all at once, so every time we had an expense, we drew out of that pool of money. If we were to not use it all, we wouldn’t have to pay it back. (We used it all!)

We had a variable interest rate of 4.84 percent, which was scary, because you never know when rates might go up, though there was the option to pay extra to lock it. That’s a gamble, because they could also go down (which, ultimately, they would have). Technically we would only be required to make minimum payments in the first 10 years of the 30-year line of credit (what they call a “draw period”), but if we did that it wouldn’t reduce the principal at all. Also scary. 

Once we finished with the work we started looking at how fast we could pay off the line of credit, and it got very confusing. Basically, it was like having a giant credit card balance. We couldn’t seem to get a straight answer from the lender on how much we’d need to pay per month in order to pay it off in X number of years. 

Because we didn’t like that uncertainty we ended up starting over at a locally based lender who understood the quirks of our house and neighborhood. Then we refinanced our mortgage and rolled in the HELOC balance. Fortunately the additional improvements we’d made had increased our property value plenty enough to do that. 

Would I do a HELOC again? Honestly, I did it as a last resort. Some aspects, like the flexibility to only take what you need, are nice. And it did work for our purposes, temporarily. But overall I’m glad we switched to a conventional refinance once our work was done.