You've purchased a home a while ago and you're ready to start improving it and adding to its' value. Since your home is your family's private space, it's only natural that you'll want your home to be more functional, comfortable, and something you can be proud of.
Maybe you're tired of looking at the outdated flooring and cabinets in your kitchen. Maybe you're wondering if knocking out a wall will allow your home to have a more open concept. Or maybe you're tired of looking at your unfinished basement and ready to entertain family and friends and be more accommodating when visitors stay overnight.
Whatever your reason for wanting to upgrade your home, these renovations won't pay for themselves. Whether you choose to hire a contractor or go to the DIY route, you'll want a budget that's flexible enough to get the job done correctly. This is why obtaining a home equity loan may be an option you'd like to consider.
What is a Home Equity Loan?
A home equity loan is commonly referred to as a second mortgage because it lets homeowners borrow money by leveraging the equity in their homes. You'll need at least 20-30 percent equity in your home, but this loan is worth it because it allows you to borrow money at a lower interest rate, plus the interest you pay on your loan may be tax deductible.
How Does it Work?
The interest rates on home equity loans are often lower than the rates for credit cards and other consumer loans so you could actually save money in the long run with this option. When choosing a home equity loan to help fund your home remodel project, there are two main options to choose from.
1. Find Out How Much Your Repairs Cost First and Borrow a Fixed Amount
Once you have a firm estimate from a professional regarding how much your home upgrades will cost, you can apply for a fixed rate loan which will provide one lump-sum payment that you can repay over a set time period and interest rate. The best thing about this type of equity loan is that both the loan term and rate never change as long as you make on-time payments. Plus, you'll have all your remodeling expenses covered at once so you can focus on the fun part – improving the overall look and feel of your home.
2. Pay on Home Improvement Expenses as You Go
When remodeling your home, it's very likely that unexpected expenses will come up. You very well might have to spend more money than you were quoted and that's okay as long as you choose a home equity line of credit (HELOC). Different from a fixed rate home equity loan, a HELOC allows you to withdraw smaller amounts of cash when you need it so you can spend as you go just like with a credit card. This type of equity loan does have a fixed repayment term but the interest rate is variable and your monthly payment will depend on how much money you've borrowed.
Your Benefit to Using a Home Equity Loan
Home equity loans are an easy way for homeowners to obtain the cash they need to cover large purchases like that home remodel you've been anxious to start. With a home equity loan, you'll receive a lower interest rate and the flexibility of choosing one of the two options available to receive the loan amount. Don't forget you may be able to write off the interest you pay on your loan come tax time.
Other uses for a home equity loan include consolidating and paying off high interest debt. If you have credit card debt from a past purchase or even a project for your home, an equity loan can help you wipe out your debt faster or even help cover your child's college education.
If you're ready to look into obtaining a home equity loan for your next home improvement project, keep in mind that you will need to put your home up as collateral when you take out the loan. Make sure you have a steady income that will allow you to make on-time monthly payments. Then you'll need to: