Funding a home project with a home equity line: matching draws to the work

Why a line fits a project

A renovation rarely costs one lump sum on one day. A deposit goes out first, materials follow, and the final balance is due at completion. A home equity line of credit, a revolving loan secured by the home, lets you take money out as each bill comes due.

The alternative is a loan that pays out in full at closing. You would then carry interest on money that sits in an account waiting for the work to catch up.

Start with a written budget

A budget should exist on paper before any line is sized. List the work in the order it will happen, and put an estimated cost beside each item. Ask each contractor for a written estimate that separates labor from materials.

Then add a contingency, an extra amount set aside for surprises. Walls hide problems, and deliveries slip. Many planners set aside a tenth or more of the total, though the right cushion depends on how old the house is and how much of it will be opened up.

Matching the limit to the plan

The limit is a ceiling, and the plan is the guide. Total the budget and the contingency, then compare it with the limit a lender offers. A limit far above the plan is not a goal to reach. It is room you may never use.

Remember that the limit is also tied to your home's equity. A lender sets it after looking at the home's value and what is already owed against it, so the figure you want and the figure you are offered can differ.

Planning draws around a timeline

Turn the budget into a calendar. For each stage, note when money leaves your hands and how much.

How a draw is made

Lenders offer several ways to draw: a transfer to a bank account, special checks or a card tied to the line. Ask whether any method has a fee or a minimum amount.

Pay contractors from a record you can follow. A single account used only for the project makes it easy to match every draw to an invoice, and easy to explain the figures later.

Keep the draw amount close to the invoice. Rounding up by a few hundred dollars each time looks harmless, but over a long project it adds interest on money that never paid for anything.

What the balance does while work continues

During the draw period, many lines allow payments of interest only. That keeps monthly bills small while the project is underway. It also means the balance at the end of the work equals everything you drew.

Decide before you start whether you will pay principal during the project, after it or on a fixed schedule. Write the plan down, because the habit is easy to put off.

Cautions during a project

• Keep change orders in writing and add each one to the budget before approving it.
• Check whether a contractor's payment schedule matches your draw timing, so you are not paying early.
• Ask whether the agreement lets a lender freeze draws if the home's value falls mid-project.
• Rules on permits and licensed trades vary by place, so check with your local building department.

Photograph the work at each stage and keep the images with the invoices. A dated record makes it simple to explain where each draw went, and it helps if a dispute with a contractor ever arises.

When the work is done

When the final invoice is paid, compare the real total with the plan and note the gap. Then look at the repayment terms again: when the draw period ends, what the payment becomes, and how quickly you intend to clear the balance. A project funded in stages is easiest to manage when repayment is also planned in stages.

Some owners also keep a short list of what they would do differently, such as an earlier contingency or a tighter schedule. The next project then starts from a better plan than this one did.

Before you plan a project. We wrote this page as general reading on paying for home work with a credit line. It names no builder or lender and makes no offer of credit. Your own costs and terms depend on your home, your lender and where you live.