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Home Equity vs Home Improvement Loans

June 13, 2022

A man uses an electric drill to renovate his home after comparing home equity vs. home improvement loans.

Whether you’re planning to sell your home or just looking to make improvements, deciding how you’re going to fund the costs might seem overwhelming. But there are options for you to consider!

Looking into home equity loans vs. home improvement loans is a good first step toward deciding which is best for you and your current finances. We’ll compare the options below so you can get started in the right direction. 

HOW A HOME IMPROVEMENT LOAN WORKS

A home improvement loan is a personal loan used to help finance any of your home improvement projects. A home improvement personal loan isn’t secured since you’re not using your home as collateral. 

This means the interest rates are often higher than with home equity or other secured loans. If you don’t currently have much equity in your home, this loan type is best for you. You could use the funds to help boost the value of your home or make emergency repairs if you don’t have the cash on hand. 

Advantages of Home Improvement Loans

The greatest advantage of securing a home improvement loan is its quick access to funds that can be used however you want. 

But keep in mind that these types of loans usually require a strong credit history. This ensures you’ll secure the most competitive interest rate and pay less over time. 

Another advantage of a home improvement loan is that a lender can’t take your home if you can’t make your payments. Since it’s not used as collateral, your home won’t be on the chopping block. But, if you default on payments, your credit score would be at risk.

HOW A HOME EQUITY LOAN WORKS

A home equity loan is a secured loan that allows you to borrow against your home equity. These loans offer a fixed interest rate and repayment term. The interest rate you receive depends on your personal financial history, which includes factors such as your credit score, payment history, loan amount, and income. 

If your credit improves after obtaining the loan, you might be able to refinance for a lower interest rate. Keep in mind that you’ll need a good amount of home equity to qualify — usually 20% or more. Your monthly payment will be based on the amount borrowed, term length, and interest rate. You’ll pay these funds back on a fixed schedule over the loan term. 

Advantages of Home Equity Loans

If you take out a fixed-rate home equity loan, your payments are predictable over time. From the start of the loan, you know exactly what your interest rate and payments will be for the entire duration of the loan. These don’t change during the payback period. This is a great option if you’re committed to monthly budgeting.

You will also receive the money you are borrowing in a single lump-sum payment. If you know what you want to spend the money on and have an idea of your timeline, knowing when you will get all the money you need is great for planning. 

Home equity loans usually have a lower interest rate than other forms of financing. Since your home serves as collateral, these loans are seen as less risky for lenders. Bonus tip: Any interest paid may be tax-deductible if used on home improvements.

ANOTHER OPTION: HELOCS

Now that we’ve reviewed home equity vs. home improvement loans, let’s examine the third alternative. With a home equity line of credit, or HELOC, you’re approved for a line of credit up to a certain amount much like how a credit card works. You then repay the funds slowly over time. Typically, lenders will let you borrow from 80% to 95% of your home’s equity. 

When you obtain a home equity line of credit, you are given a draw period or length of time during which your line of credit will stay open. Draw times typically average 10 years. After the draw period is over, you enter into the repayment period, which can be anywhere from 10 to 20 years.

Similarities: Home Equity Loans and HELOCs 

The similarities between the home equity loans and HELOCs are in how they are secured. Both loans use the equity you’ve built in your home as collateral. When it comes to which one you should choose, it’s important to consider your financial situation, and why you might need a loan. 

You can use the money as you see fit, though it’s generally recommended that you only borrow against home equity for value-adding home improvements or debt consolidation. And you must remember with your home as the collateral any failure to make payments could lead to foreclosure.

HOME EQUITY VS. HOME IMPROVEMENT LOANS AT FIBRE FEDERAL CREDIT UNION!

Here at Fibre Federal Credit Union, we are happy to provide you with access to home equity loans, home improvement loans, and HELOCs!

Use your home’s equity in a variety of ways – from debt consolidation to home improvements, vacations, or education expenses. If you’re approved for a home equity loan or line of credit here at Fibre, you can get the funds you need when you need them! 

Click below to learn about our loan options.

Home Equity Loans

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