Make Home Improvements with a Home Equity Line of Credit

When looking to make major improvements to your home, there are a number of factors to consider before you break ground. Whether you’re thinking about a project as small as a bathroom update or as large as a room addition, you should always consider the cost. Before you commission the blue prints and plans to be drawn up, be sure to figure out the best financing solution for you. From utilizing your savings nest egg to tapping into the equity you’ve built in your home, there are a few key factors to help you decide:

Availability of funds – Before you settle on one form of payment over another, it’s useful to figure out which payment option works best for your situation. For example, in the case you are thinking about undertaking a $2,000 remodeling project, tapping into your savings account that has well over that amount may be a viable solution. However, if you are considering a much larger project, and don’t have the available cash on hand or would significantly impact your savings, you may have no other option than to take out a home equity loan or line of credit. However, keep in mind that most lenders only allow you to borrow up to 80 percent of the equity you’ve established, so make your home improvement decisions with that in mind.

Future repayment – Another factor to keep in mind before borrowing any money is repayment of funds – whether borrowing from yourself or your home. Are you looking for a more flexible borrowing option that may not require you to pay back the funds with interest? If that’s the case then borrowing from your own savings may be the right decision for you. And while you can take your time to rebuild your savings, it’s usually best to pay it back as soon as you can because you never know when that money will be needed again.

On the other hand, when you borrow from your home’s equity with a home equity line of credit, you will have to repay the money you borrowed. Unlike a home equity loan which gives you one lump sum that must be paid back with fixed monthly payments, a home equity line of credit is just that. It’s a revolving credit line that lets you use as much or as little as you need – and leave the rest untouched, so you’re not paying on more than you use.

Interest rate – While most people may not have the option of taking advantage of their savings for large-scale projects, deciding between a home equity loan and line of credit may be the next option. It’s important to compare home equity rates before making your decision. Consider the following:

A home equity line of credit (HELOC) typically offers a variable interest rate. So when interest rates are low, a HELOC usually offers you more attractive interest rates than a loan.

Although the interest rate on a home equity loan may be a bit higher depending on the rate environment, many homeowners are willing to pay the increased rate in order to have a fixed rate and steady monthly payments. A home equity loan may be able to provide you with the extra stability that you’re looking for when financing your home project.

Whether you’re making necessary home renovations to keep your house functioning at its best or undertaking a dream upgrade, there’s no better place to start the process than to find the financing that fits your situation. Also, try this insightful loan decision calculator to help you as you decide the ideal borrowing solution for you.