Education, Financial Tip, Home, Money
by Insight Credit Union,
March 25, 2021
Q: I’m doing some home renovations this summer and I’m not sure how to finance this expense. There are so many loan options, but which one makes the most sense?
A: Whether you’re gutting your entire kitchen or turning your basement into a home theater, we’ve got you covered! As a Insight Credit Union member, you have several choices when it comes to funding a home renovation. And we want to help you find the right one for your specific needs.
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. Home Equity Loan
A home equity loan is a loan that’s secured by your home’s value. 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.
2. 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.
3. 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.
4. Retail 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 shops, may encourage you to finance a large renovation project on their card. However, this is usually not a good idea.
5. Merchant loan
A merchant loan, or a merchant cash advance, is a loan that’s taken out against a business’s anticipated revenue. If you are a business owner, a merchant loan will need to be repaid with a predetermined percentage of your future revenue.
There are so many loan options and so many strings attached! How can you fund that home renovation?
Enter the home equity line of credit (HELOC).
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. When the draw period ends, the loan will have to be repaid, either immediately or within the next 15-20 years.
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).
When looking for a way to pay for home improvement projects, we recommend a HELOC. And for good reason.
Here are just a few benefits of choosing a HELOC over another loan type:
Also, because you’re only paying interest 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 Insight Credit Union today to get started on your HELOC application!