With spring just a few weeks away, it’s a good bet that many homeowners are considering home improvements. And why not? Spring is the perfect time to turn your dreams into reality.
Improvements to the house or the yard (perhaps a pool) can turn your living space into a summer oasis. Whatever your plans are, this is a good time to figure out how to finance your projects.
For larger projects, consider a home equity loan or line of credit. These options typically offer lower rates and flexible repayment options, compared to an unsecured home improvement loan. Keep in mind, the amount you can borrow depends on the equity you’ve built in your home.
What’s equity? Glad you asked.
If you make mortgage payments, you likely have ‘equity.’Equity is the difference between what you owe on your mortgage and what your home is currently worth.
It’s important because equity is another word for money – your money – and you add to the amount of equity you have every time you make a mortgage payment. Equity is the biggest financial perk that comes from owning a home.
If you ever need money, whether it’s for home improvement, a wedding, or paying off high-interest debt (like credit cards) consider borrowing it from the equity you’ve built by applying for a Home Equity Loan or a Home Equity Line of Credit (HELOC).
Which one is right for you?
That really depends on how you plan to use the money.
The main difference between the two is that a Home Equity Loan is a lump sum of money borrowed and repaid at a fixed interest rate.
If you want to put an addition on your home and you need $40,000 up front and don’t want to deplete your savings, a Home Equity Loan is something to consider.
A Home Equity Line of Credit, HELOC, is a sum of money borrowed incrementally from a line of credit and is repaid at a variable interest rate. You repay only what you borrow, not the entire sum, and you can keep borrowing from it as long as there is credit availability. Think of it like a credit card that has a limit equal to the equity you’ve build in your home.
Some financial institutions offer a flexible HELOC, meaning you can segment off a portion of the HELOC and repay it at a fixed rate, which comes in handy for budget-minded individuals who prefer to know exactly how much their payment will be each month. It’s the best of both worlds in some cases.
If you have several goals in mind, such as making smaller improvements, or if you have a fall wedding on the horizon and you’ll need to make deposits and purchases throughout the year, perhaps a HELOC fits your needs better.
How much can you borrow and what are the benefits?
With either type of equity loan, you can usually borrow up to 85 percent of the equity in your home, and a key benefit of either loan is the amount of money you could save based on the interest rate.
Compared to a credit card or a personal loan, the interest rate on a Home Equity Loan or HELOC is usually lower.
How much lower? The rate on a Home Equity Loan usually starts at around 5 percent (HELOCs are usually a bit lower) while credit card interest rates are more like 16 percent.
Personal loans vary according to your credit score and start at around 9 percent for someone with excellent credit. That difference can add up quickly, especially if you plan to borrow a large sum.
Home improvements mean more equity
Another benefit of these loans is that a portion of the interest may be tax deductible, and you’re adding to the value of your home, which means, yep, more equity. It’s always a good idea to speak with an accountant if this is an option you’d like to explore.
The best part about using a Home Equity Loan for major purchases or improvements is that it’s basically worry-free. There are no surprise fees, no over-the-limit spending because you only have a set amount of funds, and no huge interest rates.
Whether it’s for a major project, an upcoming expense, financial emergency, or you just like a nest egg that can be accessed immediately, a Home Equity Loan or HELOC just might be the answer you’re looking for.
If you’re interested in a Home Equity Loan or FlexChoice HELOC, speak to one of our home equity specialists. They can help you decide which option is right for you. From now through June 30,2022, well even pay up to $500 on your closing cost. For more on Community Choice Home Equity Loans, click here.