How to Finance Home Improvement With a Home Equity Loan or HELOC

Oct 18th, 2017 |
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Whether your house has fallen into disrepair and is badly in need of a refurbishing, or you would like to add on an extra room due to family expansion, or perhaps you have a mind to create that dream landscape around the house, now is a good time to act.
In addition to the gains from improvements in life quality home modifications, they also represent a sound property investment.
A house in an excellent state of repair, extra rooms and a beautiful garden all enhance the property’s value. As the market value of your home increases, so does the equity value – the difference between the price the property is not expected to bring and the amount still owed on the original mortgage. The higher the equity, the better loans you are going to be offered should you wish to borrow with your home as security.
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Setting for the moment quality of life issues aside, from economic considerations it is worthwhile borrowing to finance home improvements if the value added is going to exceed the costs of borrowing.
If you have a substantial sum of cash that is not currently tied up obviously using this money is going to be the cheapest way to pay for home alterations, but most people wish to avoid having large sums of money at home or on their person and usually large sums are invested.
Normally, it comes down to a choice between withdrawing from savings and investments and borrowing.
Two principal calculations need to be made, and depending on the result you are going to know if it is a good idea to make major home improvements now, and if so, how best to finance them:
Having decided that a loan is the preferred option for paying for adding that new wing onto you house, which of the many loan plans is best for this purpose?
For minor improvements paying by check or credit cards are probably the most economical choices, but for major home improvements the consensus of opinion favors home equity loans and HELOC (Home Equity Line of Credit) as the most economical choices.
Both these loan types are equity-based and their main advantage over other loan and credit types are significantly lower rates of interest and the opportunity to make your debt tax deductible. They are popular sources of finance for home improvements and other special expenses beyond the monthly family budget.
If your property offers the bank sufficient equity, at the same time as paying for the building work you might be able to take advantage of the home equity loan or HELOC to pay off credit card and loan debts carrying much higher interest charges and so achieve a very advantageous debt consolidation. Such an arrangement can bring you all the benefits of a beautiful home, increased equity and reduced debt burden.
While both the home equity loans and HELOCs use your property as collateral, there are distinct differences between them that should be taken into consideration.
Whichever loan type you finally decide upon there is much to gain by approaching at least three potential lenders and comparing their offers.
Simon Zhen is a research analyst for MyBankTracker. He is an expert on consumer banking products, bank innovations, and financial technology.
Simon has contributed and/or been quoted in major publications and outlets including Consumer Reports, American Banker, Yahoo Finance, U.S. News – World Report, The Huffington Post, Business Insider, Lifehacker, and AOL.com.