With rates near historic lows, how to choose between 3 popular ways to finance home renovations
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If you’ve spent a lot of time at home over the past year or so, you might have had it with your old-fashioned kitchen, undersized home office, or dingy backyard. You are thinking about renovating your home, but you don’t know how to pay for it. Of course, using your own savings to renovate your home is the ideal scenario, but if you don’t have it and want to renovate, options like a Home Equity Line of Credit (HELOC), personal loan, or home equity loan. Home equity can get you over the obstacle. “When it comes to renovating your home, the financing options are actually quite plentiful,” says Erin A. Alton, mortgage consultant with Fairway Independent Mortgage Corporation in Annapolis. But, she adds, “There is no one product that works for everyone.” Here’s how to choose between a HELOC, home equity loan, and personal loan.
A home equity line of credit is a loan that allows homeowners to access cash, when needed, by using their home as collateral.
The advantages of a HELOC: They have two big advantages over home equity loans and personal loans: interest rates for HELOCs tend to start very low (some rates now start at around 2%) and they give homeowners flexibility because you can take the money as needed, rather than getting the money in a lump sum like you would with a home equity loan or personal loan. “You can use what you need and pay no interest on the rest, even if it’s available if you need it,” says Bobbi Rebell, Certified Financial Planner and Personal Finance Expert at Tally. Andrew Ragusa, CEO of REMI Realty in New York, says HELOCs are one of the best ways to borrow money now, as some borrowers can get it at rates ranging from 2% to 4% depending on your location. credit score. “There are no monthly maintenance fees to pay and you only pay interest on the amount you use,” Ragusa adds.
The disadvantages of a HELOC: However, they are not perfect. HELOCs can incur closing costs, and it may take a few weeks or more before you get the funds. Additionally, HELOCs generally have variable interest rates, so their rates can go higher than a home equity loan. Another thing to consider: “You can pay them back and then borrow again. But if your home’s value drops or your creditworthiness changes, the bank can reduce or revoke the loan, ”says Rebell. And, of course, you are using your home as collateral with a HELOC, so if you don’t pay it back, you can lose your home.
For whom a HELOC works best: People who do not know how much their project will cost and those looking to consolidate high interest debt.
Home equity loan
A home equity loan is an amount of money that a homeowner can borrow against the equity he has accumulated in his home.
The advantages of a home loan: While home equity loan rates often start higher than HELOC rates right now, they are fixed and typically offer lower rates than personal loans, with some home equity loan rates starting at around 3%. Some pros say it’s a good idea to lock in that low rate for the life of a loan now, especially if you know it will take a little while to pay it off. “You borrow all of the money at once and get stuck on a fixed monthly payment for the entire repayment term,” says Greg McBride, chief financial analyst at Bankrate. You can also often get a good size loan: “If you have a lot of equity in your home, you can potentially get a large loan, although usually the combined amount of the home equity loan and the amount you owed on your mortgage cannot exceed 85% of your home’s value, ”says Jacob Channel, senior economic analyst for Lending Tree.
The disadvantages of a mortgage: You have to take the money from a home equity loan in the form of a lump sum that you start to pay off quickly, so if you don’t need the money all at once, it may be. – be not the right option for you. Another downside to a home equity loan is that you will likely have to pay between 2% and 5% of closing costs, according to Channel. And unlike personal loans, which tend to be processed quickly, home equity loans can take anywhere from two to six weeks. And Rebell warns that with this option, you are using your home as collateral, so if you run into financial trouble and can’t make payments, your home may be in jeopardy.
Who a home equity loan works best for: A home equity loan is ideal for homeowners who know how much money they need to complete a project.
A personal loan is a one-time cash payment from a lender that is usually repaid in monthly installments.
The advantages of a personal loan: A personal loan can offer the easiest and fastest approval, with funds being deposited into your account within 72 hours. And because these loans are usually unsecured, you aren’t putting your home at risk if you don’t pay back (your credit, however, is another story).
The disadvantages of a personal loan: “Because it’s unsecured, the amount you can borrow will be less than what a home equity product can offer and the interest rate will be higher,” says McBride. Channel notes that while you will receive a lump sum payment and you may not necessarily need to post collateral, higher interest rates and shorter repayment terms can mean monthly payments are more difficult to keep up with. Personal loans are also subject to fees, which can average from 1% to 8% of the total loan amount.
For whom a personal loan works best: Borrowers who need funds faster can consider a personal loan.