Your house needs updating and you have home equity. You've got to choose among home improvement loans -- which best meets your needs? Home equity loans (aka second mortgages) provide a lump sum of cash on a one-time basis, while home equity lines of credit (HELOCs) provide a credit line that you can access as needed. Which option works best for you? That depends on the nature and scope of your home improvement project, and whether you'll be working on one type of repair with one contractor or a major project with multiple contractors and vendors.
Home Improvement Loan Example
A storm blew off a section of your roof and you want to replace the whole thing. This is an example of a one-time home improvement that could be handled with a second mortgage. Depending on your amount of home equity, you can plan to borrow the difference between what the new roof costs and any amount the insurance company pays, plus a cushion of ten percent to cover unexpected expenses.
According to the Federal Trade Commission, a home equity loan is structured like your home mortgage; it's made for a specific amount of money that's repaid with installments over a specified time period. Home equity loans generally have fixed interest rates and are a good choice for a one-time project such as replacing your roof or installing a fence.
Home Equity Line of Credit Example
Home improvement loans also include home equity lines of credit or HELOCs. A HELOC is a great choice if you're paying for home renovations over a longer period. Your nest is empty and you want to turn a bedroom into an art studio. You want new flooring and the kitchen needs updating, not to mention that the whole place needs paint inside and out. You can reinvent your home with ongoing home improvements and withdraw funds from your HELOC to pay for it as needed.
In these situations, you're charged interest on amounts withdrawn, so paying as you complete each project makes more sense than borrowing a lump sum upfront to cover all of your projects. A line of credit also provides quick cash for unexpected expenses. The Federal Reserve notes that HELOCs generally have adjustable interest rates as you'll withdraw funds over an extended period. A HELOC offers a cash stream for complex renovations or sequential home improvements made over time. You can pay each contractor or vendor as work is completed without having to guess in advance how much you'll need.
Home Equity Loans: Don't Go Overboard
Your home improvements will enhance your enjoyment of your home unless you can't make the payments on home equity financing. The Federal Reserve reminds homeowners that home equity loans and HELOCs carry risks; they are mortgages, and that means you can be foreclosed on and your home sold at auction if you default. When considering home equity loans for home improvements, please keep in mind that you may qualify to borrow more than you can realistically afford to repay. The Federal Trade Commission cautions homeowners that you can lose your home if you fail to repay your home equity loan or line of credit.
LendingTree's network of lenders provides free quotes on home equity loans and HELOCs and can help when you're ready to shop for home improvement loans.