Is Using a Home Equity Loan a Good Idea When Renovating a Property?

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Right now, you might be contemplating on changing or fixing a few things in your house. You might also be wondering whether using a home equity loan is a good idea to finance that. Well, the answer is yes and no. Although home equity loans offer low structured interest, according to Clopton Capital it not the best way to finance home renovation for everybody.

To understand why this is the case, we need first to know what is the nature of a home equity loan.

Often, home equity loans are referred to as 2nd mortgages as they are highly similar in terms of payment schemes. Payment terms are set, and they should be paid back with a period of 10,20, or 30 years. This type of loan technically allows you to borrow against the equity of your house.

So, what is equity? Equity is the market value of real property. The longer and the more consistent you pay a mortgage, the higher your equity will be. This also means that the amount you will get out of the loan can also be higher.

Types of Home Equity Loans

  • Fixed-Rate Home Equity Loans

This is the no-fuss type of home equity loan. Once your application is approved, the lender will give you the lump sum money that you asked for. That amount of money will then be paid in a set time with a fixed interest rate. Usually, they can be paid in over 5 to 15 years on top of your mortgage.

With this type of loan, lenders usually have different interest rates. This is why it is ideal to check out multiple lenders to find the best interest rate and timeframe that will suit your needs.

  • HELOC or Home Equity Line of Credit

The significant difference of HELOC with fixed-rate home equity loans is in the interest rates. HELOC interest rates usually fluctuate depending on the market rates. This is why this type of equity is a lot riskier, especially if you plan to pay it back after many years. It is hard to predict how much more interest there will be as time goes by. Most Lenders also charge yearly fees for HELOC regardless if they are used or left alone.

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However, the beauty of HELOC works like a credit card in some ways. Lenders will provide you with an approved credit limit, which you can borrow money on as a debt. You can use it for emergencies aside from doing home renovation. Unlike fixed-rate interest, the money that you can get out of HELOC is not a lump sum. You can withdraw only the amount you need for that particular time.

When is Using Home Equity Loan for Home Renovation Ideal? 

  • It is ideal when you have a good credit history. 

Credit history will give you the credibility that you will pay the money that you borrow back. This means that if you have been paying your mortgages consistently and you do not have any negative records, then your chance of getting approval becomes significantly higher. This is especially important if you intend to take out a HELOC loan because a good credit history means that you will likely get a more upper credit line.

  • It is ideal when you need it immediately.

If your roof is leaking and your toilet is clogged continuously, getting a home equity loan to finance the renovation is ideal. This is because these things have to be immediately fixed for the safety of those inside the house. It will also help maintain the value of your property. Allowing these issues to persist may result in more significant damages at the end of the day.

  • It is ideal if your home renovation adds market value to your house. 

If there is nothing wrong with the structure of your house, and you feel like you want a little change to it, make sure that your renovation will add to its market value. Only then would it be ideal to use a home equity loan for remodeling.

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For example, if you are taking out a home equity loan to add a new bedroom or update a bathroom, then go for it. Doing this will significantly add to the market value of your house. Adding decks and garages will also do the same thing.

Other Ways to Finance a Home Renovation

Taking out a home equity loan is not the only way to finance your home renovation. Here are other options that you can consider:

  • Personal Loan

Personal loans usually do not require any collateral. The amount of money you will get depends on your income and credit history. There is also a wide range of interest rates that depends from one lender to another. Personal loans are a lot faster to get than home equity loans, but they should be paid immediately to avoid high interest rates. This type of loan is ideal if you quickly need money for home renovation that will increase your house’s market value.

  • Credit Cards

Some products and services can be charged at 0% interest for credit cards. If you plan to use it to finance your home renovation, you can renovate without added cost. However, you need to strategic with this one. You need to pick the services and products that have 0%, interest which makes your choices limited to a few options.

Credit cards usually have to be paid within months, so if you think you can pay what you borrowed immediately, then this is the best way to finance your home renovation.

Final Thoughts

You have to factor in a lot of things when you decide on how to finance your home equity. If your renovation adds to the value of your house, then do it as long as you have the right credit for it. In the process of doing so, it is best to check out multiple lenders. Compare their interest rates and payment schedule and choose which one is best suited for you.

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