If cabin fever has you looking closer at your home and wishing things were different, maybe this can be the year you take on a renovation project. Whether you’re gutting your entire kitchen or turning your basement into a home theater, you have several choices when it comes to funding a home renovation, but which one makes the most sense?
First, let’s take a look at some common choices and why they’re not the best idea for financing a home renovation project:
1. Credit cards
You may already have your credit cards open and won’t need to apply for a new loan, so you may be thinking, why not use this available credit to fund my renovations?
If you’re only doing some minor touch-ups on your home and you can afford to repay the charge within the next year or two, a credit card could work.
For bigger projects, though, funding them through your credit cards can have devastating effects on your financial health.
Cons:
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You may be stuck paying interest of 15% or more until you pay off the balance on your card. This means your remodeling project will cost you a lot more than necessary.
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Your credit score will likely be negatively affected by the large, unpaid balance on your card by pushing your balance-to-total available credit ratio well above 30%.
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You might send yourself spinning into a cycle of debt once you already owe so much money on your card.
2. Personal loans
Personal loans are short-term loans that may or may not be secured by some form of collateral (like a car or other titled good). They typically need to be repaid within 24-60 months.
Cons:
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Upfront costs and interest rates on personal loans can be higher than other types of loans.
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You’ll receive all the money you borrow in one lump sum. This can compel you to spend it all, even if you don’t need to do so.
3. Store credit cards
Retail stores often lure customers into opening a credit card with the promise of being granted automatic savings when using the card for future store purchases. Some retailers, especially home-improvement stores, may encourage you to finance a large renovation project on their card. However, this is usually not a good idea.
Cons:
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Retail credit cards tend to have exorbitant interest rates of up to 30%. (Applying for a credit card from a credit union can help you get much better terms.)
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With so much credit available, the urge to splurge and go all out with your renovations will be that much stronger.
Types of Home Equity Loans
Using your home’s equity is a great way to pay for home renovations. Did you know there are two types of Home Equity Loans that might work for you?
Home equity loans allow you to borrow a fixed amount of cash, which you receive in one lump sum. Most home equity loans have a fixed interest rate, a fixed term and a fixed monthly payment.
There are two things to keep in mind about this type of Home Equity Loan. You receive all the funds in one shot so you need to have a good idea of what the total expenditure will be for the project. You don’t want to get into the project and find that the amount you borrowed is not enough.
HELOCs are another way to utilize some of your home's equity, but they're not exactly the same as a home equity loan.
A HELOC is an open credit line that is secured by your home’s value. HELOCs have adjustable interest rates and have a “draw” period in which you can access the funds, ranging from 5-10 years and the loan will have to be repaid by the repayment term set at the time you open the line of credit.
If you’re approved for a HELOC, you can spend the funds however you choose. Some plans may require that you borrow a minimum amount at each draw, keep a predetermined amount outstanding (balance), or withdraw an initial advance when the line of credit is first established (initial draw/advance).
HELOC Benefits
When looking for a way to pay for home improvement projects a HELOC can be a good choice. Here are just a few benefits of choosing a HELOC over another loan type:
You’ll save money
HELOCs help you stick to your budget. Instead of walking out with a huge amount of cash when you open the loan, you’ll have access to a line of credit to use as needed. This credit will only be available to you for a specified amount of time and it will have a fixed amount as your maximum draw. You’ll withdraw money in the amount and at the time you need. Plus, you’ll only make payments based on the amount of the line of credit you access (not the whole line). This aspect of HELOCs makes them especially convenient if you don’t know exactly how much your project will cost.
Upfront costs for HELOCs also tend to be lower than those of other loans.
Flexible terms
Most HELOCs have fluctuating interest rates, but some lenders allow for the possibility of converting large withdrawals into fixed-rate loans. Genisys offers the Flex Home Equity Line of Credit which has this feature.
Also, because you’re only making payments on the money you withdraw, you’ll have the freedom to take out a larger line of credit and decide how much of it to use later on.
You’re improving your home’s value
It makes perfect sense to borrow against your home’s equity for adding to its value. If you plan on selling your home within the next 10 years, it is very possible for a HELOC to pay for itself, and then some.
Are you ready to get those renovation plans rolling? Call, click or stop by Genisys Credit Union today to get started on your HELOC application!
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Sources:
https://mtgprofessor.com/A%20-%20Second%20Mortgages/what_is_a_heloc.htm
https://www.bankrate.com/finance/topic/heloc.aspx
https://www.bankrate.com/finance/home-equity/home-equity-loan-heloc-or-cash-out-refi.aspx
http://blog.mechanics-coop.com/when-is-a-heloc-the-best-choice
https://www.thebalance.com/should-i-use-a-store-credit-card-2385754
https://www.cubefunder.com/blog/what-is-a-merchant-loan/
