Fix credit score for home-renovation HELOC

Dear Dr. Don,
I recently refinanced my house through an adjustable-rate mortgage with an interest rate of 3.25 percent. Before getting the $417,000 loan, the house was appraised for $710,000.

The appraiser suggested ways to raise the value as much as $250,000 by making modifications to the house. So, I’d like to get a home equity line of credit, or HELOC, to make the suggested renovations. My current credit score is 696. Can you provide some advice about how I should proceed with financing these home improvements?

— Michael Maison

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Dear Michael,
Based on your information, there’s enough equity in your house to qualify for the home equity line of credit. But your credit score will prevent you from obtaining the best rate on the HELOC. You did get a good rating on your mortgage.

Unless you are looking to sell the house soon, I don’t think you need to make the home improvements quickly. Of course, it might be that you want to get more enjoyment out of the home while you are still in it. There’s also a chance that the suggested improvements won’t add as much as hoped to the appraised value. The experience of the past decade has been a brutal reminder about fluctuations in home values.

From an income tax perspective, I would argue that you shouldn’t be in a rush to increase the home’s appraised value with improvements. That’s because it could raise your property tax bill, in case you hadn’t thought about that negative impact. At the same time, the expense of improvements should reduce the capital gain when you sell the property.

Work on repairing your credit rating to qualify for a lower interest rate. Time and a good payment history can heal such wounds. If you can boost your credit score into the 700s you should be able to get a reduced rate on the HELOC.

  • Someone with a FICO score between 670 and 699 should qualify for an annual percentage rate, or APR, of 7.55 percent on a HELOC.
  • Someone with a FICO score between 700 and 719 should qualify for an APR of 6.175 percent.

Looking at the two rates, that’s a big difference.

There is some good news to pass along regarding credit scores. FICO has recently changed its approach to exclude past collection accounts paid off or settled. The new scoring model also distinguishes between medical and nonmedical debts. I don’t know if any of those issues are involved with your personal credit history, but the change might have already helped your credit score.

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