Preparing to finance your next renovation project can be a challenge and using the equity in your home is a big step. We want to provide you with a few ideas on funding options. Our goal here is to save you money on interest fees and provide you with enough information to make an informed decision.
Is a Home Equity Line of Credit (HELOC) the Best Choice?
A HELOC is a great tool if you require money for home renovations, medical expenses, debt consolidation to cover high-interest loans and credit cards, university tuition, and life's unexpected surprises.
What is a HELOC
A HELOC is a revolving line of credit secured by the home that provides capital for your requirements. You should expect a lower interest rate with a HELOC because you are providing excellent security to the lender. With recent tax law changes, the HELOC is still tax deductible for major home renovations. We highly recommend you consult your tax advisor regarding the deductibility of interest for home improvements.
How to Qualify For a HELOC
To qualify for a HELOC, you need to have available equity in your home. To calculate your equity, take the value of your home today less the amount you owe, the remaining amount is your equity. You can typically borrow from 70-90% of the value of your home. The percentage variance of 70 to 90% will be determined after the lenders look at your credit score and history, employment history, monthly income minus monthly debts (DTI) (We have provided a DTI calculator) The process will be very similar to when you originally applied for your mortgage. To determine the equity in the home, the lender requires a new appraisal.
Variable or Fixed Rate
Additional interest rate hikes have been announced by the Federal government in 2018. It may be wise to lock in the loan with a fixed rate with rates increasing. Many lenders will provide the ability to lock in a variable rate if you do decide to start with a variable interest rate.
Draw Period on the HELOC
When you apply for a HELOC, you will want to know is the length of the draw period, (typically 15-20 years) and when the repayment period starts. This draw period ranges with lenders so make sure to ask the lender their draw period terms and when the repayment period starts. When you start your HELOC, you are only making interest payments for the set term of the draw.
Repayment Period on the HELOC
You will be required to start repaying the HELOC at around the 10-15-20 year time frame depending on the length of the draw period. You will discuss this with the lender at the time you take out the loan. At this point, you will no longer be able to withdraw from the HELOC. This will now turn into a monthly payment that will apply to the loan amount and the interest.
What is a Home Equity Loan
A home equity loan is also referred to as a second mortgage when it's registered against your property like any mortgage. A home equity loan provides a fixed amount of money in one lump sum. The loan term is negotiated over a set period usually ranging from 5 to 25 years and secured by your home equity.
How to Qualify For a Home Equity Loan
To qualify for a home equity loan, you need to have equity in your home.
To calculate this: Take the value of Your Home – the Amount Owing on Your Mortgage = Home Equity.
You can typically borrow from 70-90% of the value of your home. The percentage variance of 70 to 90% will be determined after the lenders look at your credit score and history, employment history, monthly income minus monthly debts (DTI) (We have provided a DTI calculator) The process will be very similar to when you originally applied for your mortgage.
Variable or Fixed Rate
Home equity loans are normally a fixed rate, so the interest amount does not change over the term of the loan. You will be paying off the principal and interest monthly until complete. A fixed rate and predictable monthly payments can help you budget as you work toward your financial freedom.
Where to use a Home Equity Loan
The home equity loan is a great choice for large one-time expense such as a wedding, the purchase of a rental property or cottage, or debt consolidation to pay off interest credit cards or accumulated debt.
The interest payments on a home equity loan are also tax deductible when sued for the improvement of your home. You will need to discuss this with a tax professional to see what is allowed.
What is the Second Mortgage?
A second mortgage is another loan secured against after your first mortgage. A second mortgage or a home equity loan are all the same thing using different marketing terms. You are applying a fixed loan secured and registered against your home. These products provide you with working capital, and they all have one common, the lender places a lien against your property to secure the loan. You benefit by getting a better interest rate and the lender benefits with your home as security. You will be charged roughly the same fees as when you applied for your first mortgage including the appraisal and closing costs. Make sure you are applying for a large enough amount to money to make this worth your while.
When to use HELOC vs Home Equity Loan
Deciding which loan is right for you depends on the loan's purpose and your spending habits. For longer-term transactions, we recommend home equity loans (if you can afford the payment) over HELOC's simply because the debt paid off faster and there are no surprises in 10-20 years when the HELOC payment principal amount starts. Interest is charged on the HELOC for many years when it could have been paid off with the home equity loan.
Benefits of Financing using Home Equity
A home equity loan or HELOC provides the lender excellent security in case of default. The security allows the lenders to offer home equity loans at lower interest rates where the very best unsecured personal loan with excellent credit to start near 6%.
Financing When you Do not have Home Equity
If you have gone to your lender and requested a loan using your home as security, completed the home appraisal and found out that you do not have enough equity for a home equity loan or HELOC, now what? Here are a few options.
- An unsecured personal loan is also a good option with terms up to 7 years and loan amount up to $100,000 Contact SoFi if your credit score is above 680+,
- A new product is arriving soon from an online provider called Upgrade. They are introducing a $50,000 unsecured personal line of credit and you can add your name to the waiting list. Upgrade offers an unsecured personal loan up to $50,000 with credit scores starting at 620. Contact Upgrade
- Check with your bank or credit union and inquire about an unsecured personal line of credit. The amount offered will depend on credit score, work history, and your annual income.