With rising house prices, you might have gained a significant amount of equity in your home. Both a home equity line of credit (HELOC) and a home equity loan offer easy ways to cash in on that added value.
Whether you want to get a Home Equity Loan for a remodel or a Home Equity Line of Credit (HELOC) for home improvements, you'll have all the money you need to pay for your projects. Read on to find out about the benefits of these home equity financing options.
How to Use a Home Equity Loan or HELOC for Remodeling
Home Equity Loans or HELOC's are convenient tools that let you tap into the equity in your home to pay for an upgrade or remodel. Loans and lines-of-credit function in slightly different ways so it's a good idea to do a little research and figure out which one is right for you.
What Is Home Equity?
Equity is the difference between the current appraised value of your home and what you owe on your mortgage. You can calculate the equity in your home using these simple formulas:
To get Cash Value: Take the market value of your home and subtract your mortgage balance. For example, $400,000 home value - $150,000 mortgage = $250,000 equity.
To get Loan-to-Value (LTV) Ratio: Take your mortgage balance and divide it by the market value of your home. For example, $150,000 / $400,000 = 0.375 = 37.5% equity.
How Does a HELOC Work?
You can borrow up to 80% of your home equity and these funds are made available for you to use as little or as much as you like.
You can choose a draw period of between six and 15 years. Your draw period may or may not be the same as your repayment period.
You only pay interest on the portion of funds you use – not your entire HELOC limit.
How Does a Home Equity Loan Work?
You can borrow up to 80% of your home equity, which you'll receive as a lump sum payment.
You may choose a repayment term of between six and 15 years.
You'll make equal monthly payments, including interest, until the loan is paid off in full.
Benefits of Using a Home Equity Loan or HELOC for Home Improvements
There are many great reasons why you could choose a Home Equity Loan for remodeling or a HELOC for home improvements. Both tools allow you to access the equity in your home so you can enjoy your own experience living there while adding value for when it comes time to sell.
Possible Tax Deduction
The interest you pay on your HELOC or Home Equity Loan may be tax-deductible if you use the funds to "buy, build, or substantially improve your home." This is why it's important to keep detailed records of how you use your funds so you can prove which portion of the money was used for home improvements and which portion went towards projects.
Lower APR Than a Credit Card or Other Funding Sources
For both a HELOC and a Home Equity Loan, your interest rate will be based on your credit score, your chosen repayment term, and your LTV ratio. You already qualified for your original mortgage so, chances are, your credit is in good shape. This means your HELOC or Home Equity Loan will likely come with a more competitive rate than you could get through another type of financing, like a credit card. Plus, you may be able to borrow more money – so you can pay for a whole new kitchen, bathroom, or other major renovations.
Incredibly Convenient Payback Options
It's a win-win whether you choose a HELOC or a Home Equity Loan. With both types of financing, you get to choose your repayment term. Then it's up to you which one you prefer. A home equity loan makes budgeting easy with the same payment each month. Meanwhile, a HELOC gives you a revolving source of credit so you choose how much of the funds to use and when, and your monthly payment will go up and down depending on the amount you use.
Ability to Increase Your Equity
According to Freddie Mac, "a few of the right types of renovations can help increase your sales price." Home improvements can also make it easier to sell your home through enhanced curb appeal and other features that are important to many homebuyers. When choosing which home renovations to tackle first, it's a good idea to consider your potential return on investment (ROI). A high ROI means you're likely to get most – if not all – of the costs back when you sell your home.
Next Steps: Choosing Between a HELOC and Home Equity Loan
As you can see, you can't go wrong with either a Home Equity Loan for a remodel or a HELOC for home improvements. The decision really comes down to your vision for your home. If you want to fund one big project, like a new kitchen, maybe a loan is best for you. If you have an ongoing series of projects – big and small – perhaps the flexibility of a HELOC would suit you better.
See Our Home Equity Loans and Home Equity Lines of Credit