If a person just purchased their first ‘fixer-upper’ or they’re making improvements to their forever home, they can’t get away from the fact that home renovations take a lot of time and money. Looking into options for financing, such as home improvement loans, a HEL or HELOC means they can get the home they want and spread the cost out over a few years.
Before someone takes a hammer to the sheetrock or rips out the tub, it’s essential to understand the differences between the financing options available.
When it comes to home-related financing, the sums of money being discussed can be substantial, making it even more important to understand each product’s benefits and potential pitfalls.
A home equity loan is a second mortgage taken out on a property for a fixed amount.
The amount a person can borrow is based on the current equity available in their home. A HEL is a secured loan where their property is used as collateral – if they can’t meet the monthly repayments, the lender can foreclose on their property and take the proceeds of the sale to cover the money they owe them.
A Home Equity Line of Credit is very similar to a HEL in that it is a loan secured against their property for an amount determined by the equity in the home.
The main difference is that it is a ‘revolving’ line of credit rather than a lump sum deposit. It works more like a credit card with money available to them up to a set limit that they can draw from, pay back and then draw from again.
The HEL and HELOC aren’t really solutions aimed at first-time homeowners or people who have bought fixer-uppers, as in those cases, there isn’t usually much equity to ‘release.’ Instead, they are more for people who have owned the property for a few years that has seen an increase in value.
The simplest and arguably safest option (in terms of risk to a home) for funding home renovations is to take out a home improvement loan.
Unlike the HEL and HELOC, a Home Improvement Loan is usually unsecured and doesn’t need to use their house as collateral – meaning there is no risk of foreclosure. Of course, taking out a secured home improvement loan is possible, but even then, it will be secured against an asset such as a vehicle and not a person’s home.
It provides borrowers with a lump sum of money that is paid back at a fixed, affordable amount each month over a term that suits them.
When looking at ways to finance home improvements, the best option depends entirely on a person’s financial position and how confident they are managing their budget month to month. A HEL or HELOC can give borrowers access to a more significant sum of money; a home improvement loan gives them a manageable way to make affordable repayments without the risk of their home being foreclosed on should they have trouble making a payment one month.
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