At some point, homeowners might want to add value to their home or just remodel for whatever reason. These types of improvements can be very costly and one might consider a loan in order to pay for it. There are multiple types of loans that you can take advantage of.
But what type of loan is best for home improvements?
Let us take a closer look at the different types of loans and all of the pros and cons.
Home Equity Line Of Credit For Home Improvements
The Home Equity Line Of Credit (HELOC) might arguably be the least expensive option.
It might also be the easiest to tap into your home’s line of equity.
But unfortunately, it has a huge disadvantage.
There is a variable interest rate for the time it takes you to pay back the line of credit.
What does that mean?
Well, it means that depending on the market, that interest rate might go up at any time.
And you could be stuck paying more.
On the other hand, you could make the argument that it is almost like having a credit card that is actually from “your bank”.
Your “bank” is your house.
You can take out as much as you would like without having to take out everything.
It can make sense of using your home for credit to fund home improvements.
And sometimes a loan is best for home improvements.
But I would not suggest using the money for anything other than adding value to your home and improving your living.
So do not even think about using your home to purchase a new Benz, a Rolex, or even a trip to Dubai.
Always talk to your mortgage broker or loan officer first so that you are fully aware of any pros or cons of a Home Equity Line Of Credit.
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Home Equity Loan For Home Improvements
If you are opposed to using your home as a metaphorical credit card then there is another option which is a Home Equity Loan.
With this loan option for home improvements, you will not have to worry about a variable interest rate.
Home Equity Loans usually have a fixed income rate of periods between 10-30 years that you have time to pay back the loan.
But the downside is that now it becomes sort of a second mortgage that you have to pay off.
It also comes with a substantially higher interest rate overall.
However, unlike the Home Equity Line Of Credit, you will always know what your interest rate will be.
There is no unpleasant surprise that could jack up your monthly payments.
Talk to your mortgage broker or loan officer first to see if this might be the right option for you.
What banks offer home improvement loans?
Most of the time a contractor that is hired by the homeowner will suggest a Home Equity Loan in order to pay for the home improvements.
A lot of banks offer home improvement loans.
As do credit unions.
You should always google home improvement loan providers in your area in addition to visiting banks and credit unions.
Always shop around for the best interest rates and offers.
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Cash-Out Refinance Loan
If your project is not something major or structural then a Cash-Out Refinance is probably not the right option for your home improvements.
Maybe you decided it is time to freshen up or change the colors with some new paint.
And let us say the bill for that is $5,000.
Then you might want to consider a different option.
But let us assume that you are doing major construction to your home.
Maybe a new roof, or a new pool.
Or maybe it is time for that new edition because you just need that extra space.
Then A Refinance Loan might be a considerable option for you.
Be aware of what happens when you take out a refinance loan!
You kind of start your mortgage clock over from scratch with whatever interest rates apply to that current time.
This could really affect you negatively if the interest rates are higher at that point than what you have been paying so far.
Again, always talk to your mortgage broker or loan officer first so that you are fully aware of any pros or cons of a Cash-Out refinance for home improvements.
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