If you have equity in your home, now could be the time to use it to your advantage in the form of a home equity loan or home equity line of credit. These loans tend to come with low interest rates and can provide several tax advantages—benefits that credit cards do not provide.
Whether you are looking to renovate or repair your home, consolidate debt or pay for another major expense, taking out a loan against your equity can prove to be a savvy financial decision.
Differences between a home equity loan (HEL) and home equity line of credit (HELOC)
Before you even think about getting a HEL or HELOC, you need to understand the differences between both to figure out which is better suited for you.
With a HEL, you are basically taking out a second fixed mortgage on your home. You’ll receive a lump sum when your loan closes, and you’ll be required to make fixed monthly payments, just like you would on a 30-year fixed mortgage. Your payments will be predictable. They’ll be exactly the same each month, since the interest rate on the loan is fixed. At 1st Mariner, the period of repayment can be anywhere from 5 to 15 years. The longer the loan, the lower your payments but the more you’ll pay in interest.
A HELOC, on the other hand, is a revolving line of credit, which works more like a credit card. A HELOC comes with a variable interest rate and allows you to draw down funds whenever you need to. You’ll have a credit limit and you’ll be able to borrow up to the limit, and you’ll have a minimum payment due each month.
The one downside to a HELOC is that it carries a variable interest rate. If rates in the market were to rise, your payments can also rise.
Why should you use a HEL or a HELOC for a home remodel?
Making home improvements with a home loan can make a great investment if it increases the value of your home beyond the cost of the renovation.
For example, you spend $20,000 for a full kitchen renovation, but your home is actually worth $30,000 more when the kitchen is finished. Under this scenario, you’ve received a return of $10,000 or 50% on your investment.
Besides the possible financial returns, these improvements can make your home a nicer and more comfortable place to live for your family.
If you’re going to make improvements to your home no matter what, a HEL or a HELOC are almost always a better option than credit cards or a bank loan. The interest rates on both home loans tend to be far lower than those on credit cards or bank loans, since these loans are secured against your home.
In addition, the interest you pay on a HEL or a HELOC can be tax deductible. You should consult with a tax advisor for more information.
Should you go with a HEL or a HELOC for a home renovation?
As mentioned, a HEL is better for someone who needs the money for a one-time expense since you’ll know exactly how much you’ll need to borrow. A HELOC works better for someone who might not need a specific amount of money, but needs access to that money over a period of time.
Whether or not you choose a HEL or a HELOC to fund your home renovation depends on a few things. First, do you know exactly how much money is required for the project and the time it will take to complete it? If this is the case, a HEL might be your better option. If the project will be ongoing and the total costs are uncertain, you might want to go with a HELOC instead, but you should make sure you have the credit limit available to complete the renovation.
You can use the equity in your home to your advantage by following these tips. Just remember that anytime you take out a HEL or a HELOC, you are using your home as collateral for the loan. So if you can’t make the payments, you risk losing your home. For this reason, it’s vital to make sure you can absolutely afford the loan before making any decisions.
Steve Nicastro is a financial writer for NerdWallet.com. Previously, Steve was a local editor at Patch.com and a contributor for Seeking Alpha and GoBankingRates. He covers topics such as investing, credit cards, and insurance.
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