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We’ve got some equity in our home and I’m wondering about how to handle our renovation plans. As I understand it, I can borrow against my equity with a HELOC, use this money for the projects and pay back interest on the loan.
If we get the home appraised again, and gain more equity, can we borrow more the following year, renovate, and repeat this process as long as we like? This seems like an odd loophole, but maybe I don’t understand the limitations.
A HELOC is a line of credit that offers you preferential interest rates compared to unsecured debt. Banks offer HELOCs at lower rates, because they have lower risk of not getting their money back - because they have a legal right to foreclose your house and sell it, if you don't meet terms and conditions.
If you wanted, you could get a home appraisal every year you suspect your equity has increased, and thus increase the max HELOC amount you could borrow. Whether you use the funds for home improvements doesn't really matter much [except there's a chance these improvements increase the home's value, but that isn't guaranteed]. If your bank allows you to borrow 80% of the value of your home, then you could do this every year forever, spend the money on increasingly larger boats, and when you're 75 you would have 20% equity [assuming your home's value hadn't dropped since the latest appraisal], and no real other assets to retire on.
You ask if this is a known 'loophole', but I wonder what you think you are 'getting away with' here - you will pay interest on your HELOC every year, and your bank will allow that ~20% equity amount to protect themselves in case the housing market dips. They take minimal risk, you pay (relatively) minimal interest, but this is still just you perpetually borrowing money.
HELOC's have better rates than other debt [though typically worse rates than long-term mortgages], but financing your lifestyle through debt can lead to problems if you lose income [either through job loss or even just eventual retirement], and you should be careful of thinking of this as 'free money' or pretending that housing crashes never happen [they can happen, and you should be prepared for that eventuality - don't rely on something not guaranteed, like perpetually-increasing home values].
