Leveraging your house’s value is an ideal source with a HELOC for financing a home remodeling or improvement project. Utilizing the value of your house to secure a home equity line of credit makes sense, particularly when directing those funds back into the property. This approach is especially advantageous as home improvements often contribute to raising the overall value of your home, subsequently generating additional equity and offering potential tax benefits as well.
Even with a predefined budget for your home renovations, achieving an exact match between your initial estimates and final costs is seldom the case. In situations where project expenses fluctuate, a HELOC line of credit can offer a more sensible solution, providing the flexibility required to meet the costs associated with each phase of the project.
Many financial advisors and mortgage brokers consider the HELOC the best home improvement loan, mostly because of the product’s flexibility.
#1 HELOCs have a low interest rate
The home equity credit line has a lower, variable interest rate than a home equity loan. That second mortgage has a fixed rate and payment plan.
A HELOC usually has a low, interest only payment at first during the draw period of five or 10 years. Then, you begin to pay back principal. The home equity line rate also is variable and can go up or down during the loan term.
The rate on a HELOC will be higher than a first mortgage, but it is still very low. Just be sure that you will be able to make the higher payment once you have to start paying principal. Remodeling your home with a 2nd mortgage can be a wise a prudent financial decision.
#2 HELOCs Are Much Cheaper Than Credit Cards
The biggest reason that people get a HELOC for their home renovations is that the interest rate is a lot lower than an unsecured loan, such as a credit card. Home equity credit lines and equity loans are secured by your house. If you don’t pay the loan, you lose the home in many cases.
The home equity lender knows that people will do all they can to pay their mortgage, so they are able to loan you money at a lower rate than what you can get with a credit card or a personal loan. The fact that that the rates are great on credit lines for home remodeling is a wonderful benefit.
You could easily save more than 10% per year in interest with a HELOC over a personal or unsecured loan. With most HELOCs you can write checks to pay for expenses that come along with your home renovation project. Check with your HELOC lender to find out what payment types come with your home equity line of credit.
You can usually write off mortgage interest on your taxes, depending upon your financial situation. This can save you a bundle on taxes every year. You may not write off personal loan or credit card debt.
Just like a home equity loan, a HELOC can actually be part of an effective tax reduction strategy. Find out what is deductible on a home equity loan or HELOC today.
#4 The Cheapest Home Renovation Loan
It is unlikely that you will ever be able to get a loan for home renovations at a lower rate than what you can get with a HELOC.
#5 Quick Closing
A second mortgage is not as onerous in terms of paperwork and underwriting as a first mortgage. You will need to prove your income and credit, but underwriting will usually take less time. Most people can close a HELOC in a few weeks.
#6 Renovations Add Home Value
Using a low interest home equity line can be a smart home finance decision because you are theoretically adding value to the property. If the renovations are done affordably and wisely, you can get much of your money back when you sell the home.
As far as which renovations will give you the most return on investment, experts recommend the following:
- Minor bathroom upgrade. This type of renovation includes replacing the tub, tile, floor, toilet, sink and fixtures. If the renovation costs you about $10,000, you can expect to get more than 100% return on your investment when you sell.
- Landscaping. The typical home owner will spend approximately $3500 for new landscaping and $1500 for a designer. This also can return 100% on your investment if you design the new landscaping carefully.
- Minor kitchen upgrade. A typical $15,000 kitchen upgrade includes a new oven, cooktop, sink, fixtures, countertops and flooring. Add in some recessed lighting and you can get almost 100% return on your investment.
- Exterior upgrades: If you upgrade the vinyl siding, paint, and front entry for about $7000, you can get 95% of your money back when you sell the home.
- Replace windows. If you replace 10 windows, this will run you close to $10,000. You will get back up to $8700 back when you sell the home. You also will likely enjoy better energy costs, really making this upgrade worth it.
Getting a HELOC or a second mortgage is a fantastic way to maximize your financial benefits as a homeowner and to do house renovations at a low interest rate. In most cases an equity line of credit offers a lower initial monthly payment than a home equity loan, so it can be a good fit for you if you are confident you will have the additional income in the future to pay in the principal.
Potential Risks of the HELOC
But before you take out a home equity loan or HELOC, you need to be certain you understand the risks associated with each of them. Read on to learn what the specific financial risks are when it comes to home equity credit lines and how you can avoid them.
The biggest downside to any type of the HELOC is that you must use your house to secure the loan. When using your home as collateral to secure a loan, the bank or lender can take possession of your house to repay themselves if you miss payments or default on your equity loan for any reason.