how to use HELOC for home renovation

[Lorenzo]

DW and I took out a HELOC a couple of years ago, when we moved into an older home that had been a rental property of ours and which we have slowly begun to renovate. But we have not yet used the HELOC, and we have no prior experience with using a HELOC. Are there any pros or cons to paying contractors directly with the checks the lender gave us with the HELOC versus writing those checks to ourselves, depositing them in our regular personal checking account and then writing checks to the contractors from our personal checking account? Or no difference whatsoever?

Also, what is the best way to document how much we spent on home renovations for purposes of supporting a claim to a higher basis when we eventually sell this home? I would keep copies of canceled checks, of course. Should I make sure we also receive proper invoices, and match checks to invoices? Maybe this tilts in favor of using the lender's checks to pay contractors directly?

 

[pacergal]

When we had a HELOC for home Reno, it was via our bank where our checking/savings was.
We wrote personal checks and transferred $ from HELOC to checking acct. It was simpler for me to do it that way.
We kept cancelled checks and full receipts from contractor. They are in our file of "Home Improvements" for documentation when we eventually sell.

Whatever system works for you is what I would do.

 

[Kings over Queens]

does the lender have a limit on the number of checks you can write, or the amount?

 

[Aerides]

Remember, your heloc would be today's interest rate, and be variable. If you plan to pay it off quickly, great, if not you might want to wait until rates come down.

 

[Twilo123]

many allow you to 'lock' and 'unlock' the rate multiple times. check with your lender if yours allows this option. if so variable will not affect you if you lock them. unlock them and relock as they come down.

 

[Lorenzo]

Remember, your heloc would be today's interest rate, and be variable. If you plan to pay it off quickly, great, if not you might want to wait until rates come down.

I'm afraid we're going to just have to take our lumps, as this is not going to be our forever home. We plan to pay it off in a few years when we sell the home and move on to wherever we're REALLY going to retire--almost certainly a low cost of living region of the world.

We lived in a downtown condo for over 20 years and for much of that time we yearned to ditch that lifestyle for the American Dream house with a yard to plant things in, and space for our other hobbies, and so forth, but until relatively recently there was always some obstacle that deterred us from making the move. Now, although interest rates are less than optimal for this, we need to get it out of our system. Better late than never.

 

[OldShooter]

Remember, your heloc would be today's interest rate, and be variable. If you plan to pay it off quickly, great, if not you might want to wait until rates come down.

We used an old HELOC to smooth out cash flow as we built a new lake house. As it turned out, the old interest rate was higher than the current rate (mid-2022) so the bank just cancelled the old HELOC and we signed for a new one at an interest rate saving. No charges involved in setting up the new HELOC.

When we had a HELOC for home Reno, it was via our bank where our checking/savings was.
We wrote personal checks and transferred $ from HELOC to checking acct. I

Yeah. Same for us. When I needed some cash I just transferred on line from the HELOC to checking, then wrote checks as needed. Very smooth and easy.

Re tracking basis, I set up an asset account in Quicken and debited that account when I credited the checking account funds. I also tried to save all the invoices, just un-ordered in a folder. I really don't think I'll ever need to document our basis this way but you never know. More likely DS will get a step-up when he inherits the place.

You should also make sure to understand the mechanics' liens situation in your state. That can be a gotcha if one of your subs doesn't pay one of his subs.

 

[cathy63]

If you use the HELOC for permanent home improvements, then at least the interest is deductible if you can itemize on your taxes.

 

[Lorenzo]

If you use the HELOC for permanent home improvements, then at least the interest is deductible if you can itemize on your taxes.

Yes. We haven't itemized since the increase in the standard deduction a few years ago, though. I wonder if it will work out to our advantage to itemize next year. We'll see.

 

[rk911]

We wrote checks directly from the HELOC account and I see no reason to move HELOC funds to your checking account. If you're using Quicken or something similar just create a new account to track HELOC checks.

I strongly advise to make a photocopy of each check *before* giving it to the contractor. Attach his receipt and, when his job is done and final payment made also attach his signed lien release. Each contractor should have a separate file folder within the project file.

 

[Lorenzo]

At the risk of getting into the weeds here, I did a calculation of the finance charge at current interest rates. There's a disconnect in my head now between my reply of "we're going to just have to take our lumps" to @Aerides ' suggestion of waiting until rates come down, and now seeing the cold, hard number for the finance charge we'll be facing every month during the draw period. If I'm just going to pay this finance charge out of my savings every month, logic seems to suggest I should pay for the renovations out of savings for as long as I can hold out. Sorry for this Captain Obvious moment of reflection. Maybe it's the coffee.

 

[2retireearly]

DW and I took out a HELOC a couple of years ago, when we moved into an older home that had been a rental property of ours and which we have slowly begun to renovate. But we have not yet used the HELOC, and we have no prior experience with using a HELOC. Are there any pros or cons to paying contractors directly with the checks the lender gave us with the HELOC versus writing those checks to ourselves, depositing them in our regular personal checking account and then writing checks to the contractors from our personal checking account? Or no difference whatsoever?

Also, what is the best way to document how much we spent on home renovations for purposes of supporting a claim to a higher basis when we eventually sell this home? I would keep copies of canceled checks, of course. Should I make sure we also receive proper invoices, and match checks to invoices? Maybe this tilts in favor of using the lender's checks to pay contractors directly?

I'll answer your question about writings checks or not..Years sgo with .my first heloc they gave me a check book. It was handy to write checks to the person,company, etc. Then the 10 yr term ended, and i had to get a new Heloc. This time there is no check ook. I'm sure i could request one. But banking transfers are so fast to fiy these days. So i transfer i.mediately the amount from heloc into my checking acct. All on my backs online site. So could immediately write a paper check from my checking acct as needed.