If you’re planning on doing home renovations this year, you may be wondering how to finance it all. Should you take out a loan? Should you just charge all the expenses to your credit card? There are many options, but which one makes the most sense financially?
Whether you’re remodeling your entire kitchen or springing for a fresh coat of paint and new fixtures, we’ve got you covered with several options when it comes to funding a home renovation. You can open a HELOC (Home Equity Line of Credit) which is an open credit line secured by your home’s value. You can also fund your renovations with a personal or signature loan, use your credit cards or use a retail credit card that’s connected to a home-improvement store, like Lowe’s or Home Depot.
One of the best ways to fund a home renovation is by taking out a HELOC. Let’s take a closer look at the line of credit and its many benefits.
What is a HELOC?
A Home Equity Line of Credit is an open credit line secured by the equity of your home. Generally, a homeowner can open a HELOC with up to 90% of your home’s equity, or the difference between what’s left on your home loan and the current value. Use our home equity calculator to determine the equity of your home.
When borrowers open a HELOC, there’s a draw period when the borrower can access the available funds. Usually, the time frame ranges from 5-10 years. The loan will need to be repaid once the draw period ends, either immediately or within the next 10-20 years.
What are the advantages of a HELOC?
One of the main benefits a HELOC has over other loan options is it gives you easy access to funds. Once you open a HELOC, the funds can be taken out whenever you need them. This makes a HELOC convenient for home renovations because sometimes additional expenses come up throughout the project and you can take out more money if you need it.
Another benefit of a HELOC is its low monthly payment options. Many lenders only require borrowers to make payments toward the interest of the loan during the draw period. Once the draw period is over, the borrower will have to pay back all the principal of the loan either in one payment or over the course of 10-20 years. This can be beneficial if you don’t have the money to pay back the full loan, but know you can within the next few years.
Some financial institutions may offer the option to pay 1% of the balance. For example, if the amount you owe on your HELOC is $50,000, your monthly payment would be $500. If you prefer having a set monthly payment, this might be a good option for you.
Terms and repayment plans for a HELOC are generally flexible. If you make your monthly HELOC payments on time over the course of your terms, it can actually help improve your credit score.
Are there any disadvantages to a HELOC?
While a HELOC offers borrowers access to the funds needed to cover home improvement projects with an affordable repayment plan, it’s important to know about every aspect of a HELOC before applying.
There are typically no annual fees on HELOCs, but occasionally there could be. However, whenever you take out any kind of loan or line of credit, it’s important to find out about all fees associated with the loan before applying.
Also, borrowers will need to make a monthly payment on the HELOC as long as there’s an outstanding balance. If you default on the payments, you could potentially lose your house since the loan is secured against the equity in your home. Because of that, borrowers should make sure they can afford the monthly payments before taking out a HELOC.
When it comes to financing a home renovation, a HELOC is a great option. With interest rates at record lows, taking out a HELOC is a smart move. Right now, our No-Closing Cost HELOC has an introductory rate as low as 3.99% APR for 12 months.* Your new and improved home is just a HELOC away.
*APR = Annual Percentage Rate. 1The12-month introductory rate begins on the date the loan is funded. Introductory rate will revert to the current fixed rate at the end of the 12-month introductory period. Colorado owner-occupied properties only. Minimum credit line and draw of $5,000.00 is required. Rates are as low as 5.49% APR and are based on an evaluation of credit history, CLTV (combined loan-to-value) ratio, loan amount and occupancy, so your rate may differ. Borrow against your available credit line for a period of 5 years, after which any existing balance must be paid in full within the following 10 years. 2Colorado owner-occupied properties only. Minimum credit line and draw of $5,000.00 is required. Variable-rate loans are as low as 4.24% APR and are based on an evaluation of credit history, CLTV (combined loan-to-value) ratio, loan amount and occupancy, so your rate may differ. The plan has a maximum APR of 18%. Members with a variable-rate Home Equity Line of Credit may borrow against their available credit line for a period of 10 years, after which any existing balance must be paid in full within the following 10 years. 3Certain conditions and restrictions may apply. No closing costs in most cases. An upfront appraisal fee of $450 may be required at member expense on loans greater than $75,000 or loan-to-value exceeding 70%.