The longer you live in your home, the more likely it is that your tastes and needs will change. You didn’t mind not having a carport or garage when you first bought your property, but maybe now you’re tired of your car being covered in pollen in spring or ice in winter. Deciding to have another child may come with a need for another full bathroom instead of a half bath. Or maybe that white sink no longer goes with the appliances you’ve updated in your kitchen.
And the more tenured homeowners know well: you’ll never be immune to the surprises. A leaky shower stall, a tree crashing through your porch, or an HVAC system that decides to stall out during the peak of the season? It happens to all of us!
Wherever you are in your homeownership journey, it’s inevitable that you’ll come across needed repairs or beneficial renovations that fall beyond your budget. The good news is that there are many options available to you as a homeowner to get financing for home improvements, though they each come with advantages and drawbacks you’ll want to consider. For example, swiping a credit card for that kitchen update may seem like a convenient choice, but it will likely come with high interest rates that could outlive your new fixtures.
Instead, we’ll introduce three of the more common home improvement financing options, what they’re useful for, and the pros and cons to know. Use this as a jumping off point for your next home renovation, and don’t hesitate to consult with a tax pro, lender, or financial advisor to decide what’s best for you.
Home Equity Loan
Most borrowers seek a home equity loan in order to receive a lump sum amount. However, depending on the project you’re taking on, the funds may be distributed all at once or disbursed over a period of time. This type of loan is secured by your home, and the amount available to borrow is based on a percentage of the value of your home’s equity.
Now, “equity” is a word that gets thrown around a lot, so let’s make sure we all know what it means.
Equity is the amount your home’s value exceeds what you owe on it. For example, if you buy a home for $400,000, pay off $200,000 of the principal, and an appraisal deems the property is now worth $600,000, you’ll have $400,000 in equity you can potentially borrow.
Money.com
Home equity loans are structured in a similar way to your original mortgage: monthly payments will typically include principal and interest based on the terms of your loan. Compared to a mortgage, however, the term options for a home equity loan are often shorter, though it depends on your lender and the amount you’re financing.
Pros
- Interest paid on a home equity loan may be tax-deductible.
- Repayment terms are typically between 5 and 15 years.
- If you decide to make payments above the principal amount due monthly, your loan payments may help you start to rebuild equity.
Cons
- Some lenders may expect you to cover closing costs, such as the cost of an appraisal.
- In addition to other monthly payments you might be making on your home, a home equity loan typically involves regular payments toward principal and interest as well.
- You’ll have monthly payments on the principal and interest on what you’ve borrowed for the term of your loan.
- By using your home as collateral, there is a risk of losing your property if you are unable to make payments or otherwise fulfill the terms of your loan. (It’s recommended that you speak to your lender about your options if you expect to fall behind on payments)
HELOC
A home equity line of credit (HELOC) might appeal to you if you might need more flexibility in your financing, are unsure how much you’ll need to complete your project, or are juggling multiple projects at the same time. Like a home equity loan, the limit on your open line of credit is also based on the equity of your home, and your home secures the credit line. You can receive a lump sum on the front end or continue to draw on the funds for the duration of the HELOC up to your approved limit.
Pros
- You can be flexible with how much you borrow, up to the credit limit approved by your lender.
- Generally, interest-only payments are required during the draw period.
- Even if you are only required to make interest-only payments, you can also make principal payments, freeing up available credit on your HELOC for future use.
Cons
- After the draw period on your HELOC ends, you may be required to pay back the entire balance or make payments on the principal and interest on what you’ve borrowed.
- If you choose to close your HELOC early, you may be charged a penalty.
- By using your home as collateral, there is a risk of losing your property if you are unable to make payments or otherwise fulfill the terms of your HELOC. (Again, it’s recommended that you speak to your lender about your options if you expect to fall behind on payments)
Home Improvement Loan
A home improvement loan differs from both a home equity loan and HELOC in that it does not require the value of your home’s equity to secure the loan. Rather, this type of loan can be secured or unsecured (meaning it does not require collateral). You may also obtain the entire amount upfront, which is most typical, or draw on it as your project progresses.
Pros
- You’ll often enjoy a faster approval process than you would have with a loan or line of credit based on home equity.
- Because your home is not used to secure the loan, there is no risk of losing your home if you fall behind on your home improvement loan payments.
Cons
- Loans are typically issued for the purpose of renovations or improvements to the home, unlike funds borrowed through home equity loans or HELOCs, which can be used for other purposes.
- An unsecured home improvement loan often has a more limited borrowing amount, so it is better suited for smaller budgets. Also, available interest rates are often higher and term limits may be shorter on this type of loan.
- Lenders may have specifications for what types of properties are eligible for renovation through a home improvement loan.
- You may be responsible for other fees associated with the loan, such as origination or administrative costs.
Which Loan Type Is Right for You?
There’s no “right” choice when it comes to your home improvement financing options. Ultimately, you’re shopping for the best fit among these options – along with many more – based on your goals, needs, budget, and timeline.
If you still have questions or concerns about home equity loans, HELOCs, or home improvement loans, don’t hesitate to visit your nearest SouthEast Bank branch. Along with your tax and financial advisors, a local lender can help you navigate through options and assess what rates and terms may work best for you and your family.
Information contained in this blog is for educational and informational purposes only. Nothing contained in this blog should be construed as financial, legal, or tax advice. A professional advisor should be consulted before making significant financial transactions.
