Home Equity Loans Can Be Used To Finance Home Improvement, But Should They?

Posted by Rana & filed under Home & Mortgage Refinance Information.

Home improvement is a common desire for those who own their own homes.  Some people choose to modernize different rooms in their homes, while others wish to add additional rooms.  Almost any well-planned home improvement project can increase the value of the property.  That said, many people simply do not have the funds needed to begin projects of this magnitude on their own.  Therefore, a number of homeowners utilize home equity loans to pay for their home improvement needs.                                         

Before applying for a home improvement equity loan, it is important to understand how they work.  With a home equity loan, a lender agrees to loan the homeowner money based on the equity available in their property.  Equity is calculated by subtracting the current principal balance from the estimated worth of the property.  This figure is the amount that can be offered to the borrower in the form of a home equity loan.

A equity loan is a fixed-term loan, meaning the homeowner agrees to repay it in a specified amount of time.  This period of time generally ranges from 5 to 15 years (although some can be taken for a bit longer).  A great benefit of this type of home improvement equity loan is that the interest rate is fixed, and the payments will remain consistent throughout the life of the loan.  Additionally, this fixed-rate is generally lower than what most people will have to pay on unsecured debt and credit cards. 

A home equity loan can be a great way to finance home improvements and the application process is easy-to-understand and easy-to-complete.  The homeowner simply needs to know the estimated cost of the proposed improvement, the current value of the home, and the current amount owed on the home.   The principal amount due on the current mortgage can be found on the last bill or by contacting the lender.  If there is indeed equity on the home and it is enough to pay for the improvements, a home equity loan may be a fast, easy option for the homeowner to complete.

The only possible drawback to using a home equity loan for home improvements is that the borrower cannot borrow additional funds via a home equity loan until the initial loan amount is repaid.  For this reason, it is important for the initial calculations to be explicitly correct. 

Another type of home equity loan is the Home Equity Line of Credit (HELOC).  It is similar to a home equity loan in that the life span of a HELOC is shorter than that of the average mortgage.  A HELOC is a revolving line of credit against the equity in the home.  This type of loan gives the borrower the option of withdrawing the full amount of the loan immediately or taking out partial amounts of the loan as needed.  This can be a great option for those homeowners who wish to pay for improvements as they are completed, instead of paying the contractor the full amount of the project in advance.  This type of loan benefits the borrower financially in that interest is only accrued on the amount of the credit line that has been used.   The biggest difference between the HELOC and a home equity loan is that the interest rate for a HELOC is variable, which means it can change from month-to-month.  However, just as with a home equity loan, the interest rate for a HELOC is generally much lower, especially when compared to the rates that most people have on their other types of credit debt.   An additional consideration for the HELOC type of credit revolves around amortization.  Unlike a home equity loan, the minimum payments for a HELOC are typically interest-only, which if followed will not pay against the principle of the loan.  If the credit consumer meets only the minimum payment schedule each month, the homeowner may find himself or herself facing a large “balloon payment” due on the maturity date.  This means that the full amount the homeowner borrowed over the life of the loan will be due all at once.  It is important that borrowers using this type of home equity loan have a plan in place to repay this line of credit by the agreed upon due date. Borrowers should not undertake a HELOC loan, if they do not have the self-discipline to pay more than the minimum payment each month.

A home equity loan can be a great vessel for homeowners to use for remodeling their homes or making much needed repairs to the property. As long as bad credit is not an issue, these loans are fast and can be qualified for easily, but be sure to review your home equity loan options.  Making use of the equity in a home can be a sound financial decision for most consumers, no matter how much money is actually needed.  The only question left to address is which lender has the best rates?

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