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MORTGAGE KNOWLEDGE CENTER

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HELOC LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

  1. Home
  2. Mortgage Knowledge Center
  3. Using a Home Equity Loan for Home Improvements

MORTGAGE

Using a Home Equity Loan for Home Improvements

What you'll learn: Is a home equity loan a good choice when thinking about home improvements

EXPECTED READ TIME: 4 MINUTES

February 19, 2021

If you’re considering having some home improvements done, you’re probably also looking at your financing options. And you might be asking yourself, “Should I use a home equity loan for home improvements?” There are several things to consider. For example, what are the top improvements that increase equity? Are there fees for a home equity loan? Is a home equity loan tax-deductible? Read on to discover the answers.

Is a home equity loan a good idea for home improvements?

If you've been living in your house long enough to have built up some equity, a home equity loan might be an excellent solution to enable you to fix or update areas. Unless you're in a brand new home, it seems every homeowner has something they feel needs updating, repairing, or replacing. Perhaps you’re thinking about getting new appliances or windows to improve energy efficiency and save on utilities. Or you may be dreaming of renovating your kitchen or bathrooms. Leveraging your home's equity can be a smart choice and increase the value of your real estate.

What should I know about home equity loans?

A home equity loan leverages your home’s equity to provide a lower interest rate loan that uses your home as collateral. Since a home equity loan is a type of mortgage, as such, there will be some costs to consider as you begin to determine if a home equity loan is right for you. Generally, however, these closing costs will be less than typical mortgage closing costs.

Home equity loans have a fixed interest rate over the life of the loan. That allows you to budget accordingly. In contrast, a Home Equity Line of Credit (HELOC) has a variable interest rate that can change with the market. It’s also important to know what's the difference between a HELOC and home equity loan. With a home equity loan, you receive your funds all at once. That means the interest on the entire amount also begins to accrue. Compare that type of loan to a HELOC. You withdraw the funds as you need them and only accrue interest on what you’ve withdrawn.

You need to be aware — that because this loan uses your home as security — if you decide to move, you'll need to pay back the loan to sell the house. If you are using the home equity loan to make home improvements, hopefully, you've increased your home’s value and can pay off the home equity loan with your proceeds. As you can see, there are many reasons why it's essential to do your research to understand if a home equity loan is right for you.

What are the benefits of a home equity loan for home improvements?

If you're using a home equity loan to improve or update your house, there are several benefits to be aware of. The first and most obvious is that you'll be able to enjoy your improvements, and at the same time, you've hopefully increased the value of your home. Some home improvements typically have a positive effect on your equity. Examples include upgrading a kitchen, bathroom, or putting on a new roof. Interior or exterior painting or landscaping can add value to the home if done right. But improvements like adding a pool, excessive wallpaper, or ornate lighting might not provide a return on your investment. Although they are enjoyable, understand how your planned upgrades might affect your home’s value.

Some other benefits of a home equity loan are that if you're using the funds for home improvement, there could be tax advantages, and you should seek advice from a tax professional to understand any possible benefits. Home equity loans also typically have lower interest rates than other forms of loans or credit cards. Also, there are different loan terms you can choose from. For example, you can choose a longer loan term with lower payments to give you more room in your budget. Or you might want a shorter-term with higher payments to quickly pay the loan off.

What should I be aware of with a home equity loan?

Do your homework with regards to your home improvement needs versus wants. If you are looking to increase your home's value as your primary reason for the loan, understand your return on investment (ROI). Your ROI needs to include the costs of the loan. These include potential closing costs and interest over the life of the loan. Try to determine if your home's value will increase enough to offset your costs.

If you're not planning to move for some time but want to enjoy the improvements over the next several years, this too is a return on your investment, just not in dollars. At the same time, you're hopefully increasing the value of your home for when you do ultimately sell.

When contemplating a home improvement loan, one thing to do is set a budget for the project and stick to it. It's often tempting to start adding to your list of planned improvements. But that may increase your loan needs. Plus, it might be smart to consider building in a buffer in case your initial construction estimates were too low. You may also uncover unexpected expenses such as additional repairs or the need to bring the home up to current building codes.

As with any loan, this is a financial decision that you should research ahead of time. When you fully understand your needs and wants, you can determine your best financial option. A home equity loan can be the perfect solution when considering home improvements, particularly if you plan the upgrades all at once. For example, if you plan to renovate your entire kitchen first and then move onto your bathrooms. We hope we’ve given you the answers to whether you should use a home equity loan for home improvements. As always, the professionals at PenFed Credit Union are here to help you and answer any additional questions you may have.

To learn more about HELOCs or home equity loans, contact PenFed:

the Mortgage Center

For more information about PenFed Mortgages:
 

PenFed Mortgage: 

800-970-7766

Get Started

SIMILAR ARTICLES

Top 10 Benefits of a HELOC or Home Equity Loan

Explore the advantages of HELOCs and home equity loans, including low rates, flexibility, savings, and more.

someone on tablet looking at home improvements

What Are the Pros and Cons of a HELOC?

A home equity line of credit has many benefits including low interest rates and tax advantages. PenFed Credit Union examines the pros and cons of using a HELOC.
fee free cash with HELOC

10 Ways to Use the Equity in Your Home to Your Advantage

There are many reasons to use the equity in your home to your advantage. Here are 10 ways PenFed suggests leveraging the equity in your home.
couple discussing home renovations and paint colors

What is Home Equity?

What is home equity? PenFed Credit Union explains how to build home equity, calculate the equity in your home, and take advantage of your home’s equity.
loan officer discussing home equity
image

HELOC LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Home Buying Steps

  • Getting Started
  • Finding a Home
  • Getting a Mortgage
  • Home Ownership

Mortgage Topics

  • VA Loans
  • Conventional Loans
  • First Time Homebuyer
  • Home Equity
  • Homebuying 101
  • Checklists
  • Adjustable Rate Mortgages
  • PenFed Top 10
  • Refinance
  • Jumbo Loans
  • FHA
  • Videos

Mortgage Products

  • Mortgage Center
  • Refinancing
  • Home Equity

PenFed HELOC

Rates as Low as % APR* with flexible use of funds

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Disclosures

1Prime Rate is % as of . The APR for this Home Equity Line of Credit (HELOC) is based on prime plus a margin and can change monthly. Fixed Rate Advances will be amortized over the Fixed Rate Advance Term, with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin, and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes.

  • Annual Fee: Notwithstanding the foregoing, an annual fee of $99 will be assessed on each account anniversary.
  • Home equity lines of credit (HELOC) are variable rate loans and the interest rate is subject to increase after consummation of the loan on monthly basis. Closing costs range between $500 and $8,500 for credit lines of $500,000. Contact a representative for additional details.

Appraisals: PenFed will attempt to establish value via an independent method. If that method is unsuccessful, or the value is not sufficient for the amount requested, an appraisal will be required regardless of CLTV. An appraisal is always required in the following circumstances:

For all loans with a loan amount greater than $400,000.

If an appraisal is required, it must be ordered by PenFed. You will be contacted for authorization and payment prior to ordering. Appraisal fees average $550 to $850 (some run higher).

  • Closing Cost Credit: PenFed will pay most closing costs associated with a home equity line of credit (HELOC), which includes credit report, flood certification, settlement/closing, property ownership and encumbrances search, recording, property search, and quick close. Member is responsible for any city, county, and/or state taxes if the subject property is located in FL, LA, MD, MN, NY, TN, or VA. If an appraisal is required, the member, who is responsible for the fee whether or not the loan closes, will pay the cost.

Interest may be tax deductible, consult a tax advisor for further information regarding the tax deductibility of interest and charges.

Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Advance Period. During your Advance Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.

Fixed Rate Advances will be amortized over the Fixed Rate Advance Term with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes and 4.75% for investment properties.

Property Insurance: Property insurance is required.

Multiple PenFed Loans: Multiple PenFed Equity loans and HELOCs are available as long as the member and collateral qualify (except Texas). For Equity loans and HELOCs the total indebtedness cannot exceed $500,000 for all PenFed Equity and HELOCs combined.

PenFed does not lend on:

  • Mobile homes
  • Co-ops or time-shares
  • Properties that are currently listed on the market for sale
  • Commercial property or property used for commercial purposes, even if a residence is part of the property
  • Undeveloped property (land only)
  • Properties with more than 4 units

Properties that are currently under major construction/renovations: Property must be fully livable, with no safety issues. (Examples: no missing rails from stairs/decks, no open walls with wires showing, missing kitchen appliances/counters, missing bath fixtures or unfinished pool).

  • Additional limitations may apply

Home Equity Line of Credit:

  • This Account has a Draw Period of 10 years, followed by a repayment period of 20 years.
  • If only minimum payments are made during the draw period, the loan balance will not decrease.
  • In Texas, the maximum CLTV available is 80% on owner occupied properties. Additional restrictions apply in Texas, so please ask a representative for details.
  • In all other states, the maximum CLTV is 85% on owner occupied properties and second homes. Additional restrictions or requirements may apply based on application characteristics.
  • Property type of Condo has a maximum CLTV of 80%.
  • The maximum CLTV available is dependent on credit qualification.
  • Rates vary depending on owner occupancy and CLTV and other loan criteria.

Minimum Loan Amount Requirements in all States:

  • For an owner occupied property or second home the minimum loan amount is $25,000 and the maximum amount is $500,000 with a CLTV of 85% or less of the fair market value.

Other terms and conditions apply; call 844-918-4307 to speak with a representative for details. All rates and offers are subject to change without notice. To receive advertised product, you must become a member of PenFed.

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This credit union is federally insured by the National Credit Union Administration. Rates are current as of September 2023 unless otherwise noted and are subject to change.

APY = Annual Percentage Yield
APR = Annual Percentage Rate


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IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Realty, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Realty, LLC, see the Affiliate Business Arrangement Disclosure.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party Website.


The content you are about to view is produced by a third party website that is unaffiliated to Pentagon Federal Credit Union. PenFed takes no responsibility for the content of the page.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Title, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Title, LLC, see the Affiliate Business Arrangement Disclosure.


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