Reports released earlier this year show a dramatic increase in the number of people staying in their current homes rather than purchasing new ones. This trend has led to a significant uptick in home improvement industry sales that are expected to continue well into the new decade. Along those lines, the number of people applying for home improvement loans is also on the rise.
Delving into the Basic Loan Options for Renovations
Those looking for a home improvement loan have a few options at their disposal. Each one offers certain benefits and drawbacks. Once you understand how these opportunities work and the pros and cons of each alternative, deciding which one best suits your needs should be a bit simpler.
Home Equity Loans
Borrowing against the equity in your property is one possibility. Equity is the value of the property minus the amount of money still owed on the mortgage. Home equity loans are secured, and the home itself serves as collateral.
On the plus side, the interest paid on a home equity loan is often tax-deductible as long as you use the money you borrow for value-enhancing home improvements rather than storm repairs or other purposes. Interest rates are fixed, so they won’t fluctuate along with highs and lows in the real estate market.
Still, this type of loan comes with the risk of foreclosure should your financial circumstances change and leave you unable to make payments. If the property hasn’t gained enough equity to cover the amount you need to borrow to carry out the intended project, this may not be the best choice.
Home Equity Lines of Credit
As is the case with a home equity loan, a home equity line of credit, or HELOC, would allow you to borrow money against the value of your property. This is another type of secured loan in which the property borrowed against would be collateral.
A HELOC is a revolving line of credit much like a store charge account or credit card. With this option, it’s possible to borrow small amounts of money in increments as opposed to taking out a large sum all at once. This could make paying back the loan faster and less stressful than it would be with a larger loan and a longer-term.
While interest paid on a HELOC is tax-deductible up to a certain amount, rates are typically variable. You might be able to borrow money while interest rates are low and quickly pay off the loan before they arise. On the other hand, rates could soar and leave you paying back a great deal more than you bargained for. At North Coast, Credit Union HELOC interest rates are based on the Prime Interest Rate published in the Wall Street Journal. Again, the property must have amassed equity in order for this to be an option.
Personal loans are among the most common types of loans at present. They can be used for virtually any purpose from vacations and vehicle repairs to college tuition and funeral expenses. Home improvements aren’t left out of the mix.
This route is helpful for homeowners whose properties have yet to build up enough equity for a home equity loan or HELOC to be a fitting alternative. It’s also the go-to choice for those who don’t want their homes to serve as collateral. Because personal loans are unsecured, collateral isn’t required. This means there’s less risk involved if you face financial hardship in the future.
Interest rates are sometimes higher for personal loans than other lending solutions, and this type of loan can be more difficult to qualify for. Of course, if you’ve developed a positive working relationship with a specific lender, you may be eligible for more favorable terms with this institution.
If you’re considering taking out a loan to update your home or make it more suited to your needs, plenty of options are available. Consider the alternatives carefully, and weigh them against your circumstances as well as the renovations you’re planning before making a final decision. Visit any North Coast Credit Union branch and review all your options.
Home equity loans and lines of credit may offer more borrowing power for those whose properties have built up a great deal of value beyond the purchase price. HELOCs can be helpful for intermittent, small-scale improvements or ongoing projects. In other cases, unsecured personal loans may be the better choice.