December 17, 2021
Home improvement projects make your living quarters more comfortable, create the look you desire, and if planned with Return on Investment (ROI) in mind may even increase your home’s value. But they can be expensive. Where will you get the funds?
Fortunately, today, it’s easier than ever to get the money you need. There are many options, including a secured home improvement loan, home equity loan, and home equity line of credit (HELOC). However, we often encourage homeowners to choose the HELOC because of its affordability and flexibility.
Here’s everything you must know.
Benefits of Home Improvements
There are so many reasons renovations are so popular.
- They can make your home more comfortable. Whether you’re adding a bedroom, transforming your kitchen, or making major repairs in the main living area, home improvements make your living space more enjoyable and usable.
- Home improvements can give your house the look you want. Maybe your house didn’t have the exact vibe you wanted when you bought it, but now you can afford to make those changes. When you’re done, you’ll have the home of your dreams without moving.
- Many home improvements can increase property value, such as kitchen and bathroom remodels, or room additions. You probably won’t see a dollar-for-dollar rate of return, but most renovations should increase your home’s value and help build equity.
Best Way to Get a Home Improvement Loan or HELOC
To make home improvements, you need funds, sometimes thousands of dollars. If you don’t have the money saved, you’ll likely wonder how you’ll fund your renovations. There are several options.
Always check credit unions first to see what options they offer. Since they are non-profit, they may offer the lowest rates. Before you choose the loan that’s right for you, decide what you might qualify for, and how you want to receive the funds since each method is different.
Home Improvement Loan vs. HELOC
The most common way to get money for home improvements is with a home improvement loan (home equity loan) or home equity line of credit (HELOC). They sound identical, and while they have some similarities, they are different.
Home Equity Loan
A home equity loan is a second mortgage on your existing home. You borrow against the home’s equity, which is the difference between your home’s value and the amount of your outstanding mortgage.
Say, for example, your home is worth $300,000, and you have a $100,000 mortgage on it. You have $200,000 in equity. Typically, you can borrow up to 80% of the home’s value, including the first mortgage. In this case, you’d be able to borrow up to $140,000 since you already have $100,000 outstanding.
A home equity loan provides all the funds at once, and you make principal and interest payments monthly. You’re free to use the funds to pay for your home improvements, and your home is the collateral for the loan.
Home Equity Line of Credit
A home equity line of credit is also a second mortgage on your home; however, it works more like a credit card than a mortgage. Your home is the collateral for the home, but you get a line of credit you can draw from as needed.
It’s the most popular option for home improvement because you can use the funds as needed, and you only owe interest on the funds you withdrew. The draw period lasts for ten years. You must make interest payments, but if you pay back the principal, too, you can reuse the funds if needed.
After ten years, the HELOC goes into repayment. This is when you make principal and interest payments for the remainder of the term and can no longer withdraw from the line. Please note, these terms may vary depending on the lender.
Secured Home Improvement Loans
Some lenders offer secured home improvement loans as another option. These loans aren’t as flexible as a HELOC. If you don’t use your home as collateral, you must put up other personal assets. If you default on the loan, the bank will take possession of the collateral.
Using your home for collateral in a home equity loan or HELOC makes the most sense because the interest rate can be lower than other options. Plus, if you plan smart — you’ll get a return on your home improvements in terms of equity.
If you’re trying to sell your home but it needs some updates, you can make the improvements, sell the home, pay off your loan, and then hopefully have a nice chunk of profit to purchase your next home.
Credit Union Home Improvement Loan
Credit unions have the flexibility of offering any type of loan they feel their clients need. If you don’t have a lot of equity in your home but need money for improvements, a credit union home improvement loan (sometimes called a personal loan) may be a good solution.
You don’t have to use your home as collateral. And you’ll still get affordable interest rates that are usually lower than interest you’d get on a credit card.
You can use the funds you need to fix up your property. This can be a great solution if your home needs repairs before you can sell it. You may get a higher price for your real estate and won’t have to haggle with buyers about necessary repairs.
A Credit Union Home Equity Loan May Be the Best Choice
Making home improvements, whether to get your home ready to sell or make your place look like you envision can be expensive, but a home equity line of credit can help.
A credit union HELOC is a great place to start. It’s one of the most flexible loans available on the market. You borrow the money only when you need it, paying interest only on the funds you withdraw. It’s like a credit card but with a much lower interest rate and better terms. When you sell your home, you’ll pay the loan off with the proceeds of the sale, and then you keep any money that’s left as your profit.
To learn more about PenFed loans or what loan is right for you: