When It's Better to Tap Your Home Equity Than Your Bank Account
Key takeaways:
- A HELOC is a revolving line of credit that allows you to borrow against the value of your home.
- HELOCs can be a powerful tool for funding expensive or unexpected home renovations.
- If a home project is small or inexpensive, paying with cash might make the most sense.
Home improvement projects can add comfort, efficiency and value to your home, but they can also come with a hefty price tag.
Whether you’re planning a bathroom remodel, replacing a roof or tackling smaller cosmetic updates, one big question often comes to mind before the work begins: Should you use your savings or borrow against your home equity with a home equity line of credit (HELOC)?
The right answer depends on the project, your financial flexibility and how much cash you want to keep on hand for the unexpected.
Understanding HELOCs vs. savings
Before diving into when to use a HELOC versus cash savings, let’s break down the difference between the two.
HELOC
Similar to a credit card, a HELOC is a revolving line of credit. That means you only borrow what you need, when you need it. With a HELOC, you have a credit limit (connected to the value of your home) and can draw from this limit. A HELOC can have a variable or fixed interest rate, and you can pull from a HELOC for any reason, not just home improvement.
HELOCs are divided into two periods:
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The draw period, where you can withdraw up to the credit limit
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The repayment period, where you pay the remaining balance of the limit over time
Your home will act as collateral for the HELOC. If your payments are late or you are unable to make payments at all, your home is at risk. If you end up selling your home, you’ll be required to pay off your HELOC.
|
Advantage |
Disadvantage |
|
Generally, lower interest rates than those on credit cards or personal loans |
Making late payments or missing payments can hurt your credit score |
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Can have a fixed interest rate |
Fees, including origination, appraisal and attorney fees |
|
Only pay interest on the money you spend |
There may be a minimum withdrawal amount |
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No restrictions on how you spend the money |
Recieving the funds may take time if you opt for paper checks in the mail |
|
Some purchases may qualify for tax benefits |
Your home is collateral if you default on your HELOC or fall behind on payments |
|
Introductory periods may come with discounted interest rates |
Set withdrawal period limits for when you can access additional funds |
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Credit limit may be higher than a credit card |
HELOC payments include interest, meaning you could pay more than the original cost of the loan |
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May allow interest-only payments during the draw period |
Savings account
Simply put, a savings account is where you can deposit cash or funds from your checking account to save for future spending. Some savings accounts, such as a High-Yield Savings Account, offer a higher APY (annual percentage yield) than your typical checking account.
When you use a savings account to fund a home improvement project, you’re typically making an immediate payment in full. That means no interest charges or additional fees; it’s all taken care of once the payment is made. However, to pay with a savings account means you need to have all the cash available at the time of the project, which can reduce your cash reserves or emergency fund.
HELOC vs. savings at a glance
|
HELOC |
Savings |
|
|
Upfront costs |
Low to no initial payment required |
Full project paid immediately |
|
Interest |
Yes |
No |
|
Emergency fund impact |
Preserved |
Reduced |
|
Monthly payments |
Yes |
No |
|
Flexibility |
High |
Limited to cash on hand |
|
Risk |
Home used as collateral |
Less financial leverage |
Choosing a HELOC vs. savings
Like a person’s finances, no two home renovation projects are the same. How you decide to fund a project will depend on a combination of factors, but these guidelines can help you decide whether paying for a project via savings or a HELOC will be the best fit for you.
A HELOC might make sense if...
You have a clear repayment plan. Don’t start borrowing from a HELOC without a plan to pay it back within a reasonable timeframe.
The project is expensive, but necessary. Major and immediate repairs like a new roof, HVAC or plumbing might strain your savings account. A HELOC can help you spread out costs over time, while preserving liquidity.
The project may improve long-term home value or efficiency. Tapping into a HELOC may be easier to justify when the home improvement project:
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Increases resale value, giving you a solid return on investment on the project when you sell your home
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Reduces energy costs, saving you more money in the long-run than interest payments on the HELOC
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Prevents larger repair expenses later by addressing the issues now
You want to preserve cash flexibility. You might not want to tie up a large portion of your savings in a single project, especially if there are other expenses on the horizon, or if you’re still building an emergency fund. A HELOC can help soften the blow of a major renovation cost by splitting it into smaller monthly installments.
Savings might make sense if...
You can fund the project without dipping into emergency savings. Most households should aim to have between three and six months of living expenses in emergency savings. If you have sufficient savings to cover a project without tapping your emergency cash, you might consider paying for it that way.
The project is simple or cosmetic. Smaller projects, like painting, replacing fixtures or minor landscaping, may not justify paying interest over time.
You want the simplest option. Paying with savings avoids complications associated with monthly payments, interest changes and variable interest rates. Sometimes, the simplest solution means peace of mind.
HELOCs vs. savings: Real-life examples
Let’s break down when it makes sense to tap into home equity versus your bank account in these real-world examples.
Home refresh: Fresh paint, updated lighting and new fixtures
Budget: $3,000
HELOC vs. cash: Cash
Why: A smaller cosmetic project usually isn’t worth taking on interest costs. Even with a relatively low interest rate on a HELOC, repaying $3,000 over several years could add hundreds of dollars in interest charges for a project many homeowners could pay for upfront without significantly impacting their savings.
Bathroom remodel
Budget: $15,000
HELOC vs. cash: Depends
Why: Paying cash will avoid interest, but it might reduce your emergency reserves depending on your savings. If you’ve been planning this project in advance, you may have time to save this cash in a high-yield savings account. However, a HELOC may make sense for homeowners who want to preserve flexibility or phase payments over time, especially if rebuilding savings would take a while.
Roof replacement
Budget: $35,000
HELOC vs. cash: HELOC
Why: Large emergency repairs can overwhelm even large savings accounts. Paying entirely in cash for a major repair could deplete your emergency fund to zero. While borrowing adds interest costs, a HELOC may help spread payments out more manageably and prevent draining long-term savings all at once.
Considering a home improvement project?
A Northwest Bank HELOC can help you fund renovations while keeping your savings intact. Visit a Northwest Bank financial center near you to explore HELOC options, calculate your borrowing power or get started with an application today.
