HELOC or Home Equity Loan: Some rates start at 2.5%. What’s good for home renovations?

HELOC or Home Equity Loan: Some rates start at 2.5%.  What’s good for home renovations?

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If you’ve spent a lot of time at home in the past year, you may have had it with your outdated kitchen, undersized home office, or drab backyard. You are thinking of renovating your house, but you do not know how to pay. Of course, using your own savings to renovate your home is the ideal scenario, but if you don’t have it and want to renovate, options like a home equity line of credit (HELOC), Personal loan Where home equity loan can help you overcome the obstacle. “When it comes to remodeling your home, financing options are actually quite plentiful,” says Erin A. Alton, mortgage consultant at Fairway Independent Mortgage Corporation in Annapolis. But, she adds, “There is no one product that fits all.” Here’s how to choose between a HELOC, a home equity loan and a personal loan.

HELOC

A home equity line of credit is a loan that allows homeowners to access cash, if needed, by using their home as collateral.

The advantages of a HELOC: They have two big advantages over home equity loans and personal loans: HELOC interest rates currently tend to start very low (some rates now start around 2%), and they offer homeowners flexibility because you can take the money as needed, rather than getting the money in a lump sum like you would with a home equity loan or personal loan. “You can use what you need and pay no interest on the rest, even though it’s available if you need it,” says Bobbi Rebell, certified financial planner and personal finance expert at Tally. Andrew Ragusa, CEO of REMI Realty in New York, says HELOCs are one of the best ways to borrow money right now, as some borrowers can get it for anywhere from 2% to 4% depending on your location. credit score. “There are no monthly maintenance fees to pay and you only pay interest on the amount you use,” adds Ragusa.

Disadvantages of a HELOC: That said, they’re not perfect. HELOCs can incur closing costs, and it can take a few weeks or longer to get the funds. Additionally, HELOCs typically have variable interest rates, so their rates can be higher than a home equity loan. Something else to consider: “You can pay them back and then borrow again. But if the value of your home drops or your creditworthiness changes, the bank can reduce or revoke the loan,” says Rebell. And, of course, you’re using your home as collateral with a HELOC, so if you don’t pay it back, you can lose your home.

For whom a HELOC works best: People who don’t know how much money their project will cost and those looking to consolidate high interest rate debt.

Home Equity Loan

A home equity loan is a lump sum of money that a homeowner can borrow against the equity in their home.

The advantages of a home loan: Although home equity loan rates are often starting to be higher than HELOC rates right now, they are fixed and generally offer lower rates than personal loans, with some equity loan rates starting as low as around 3%. Some pros say it’s a good idea to lock in that low rate for the life of a loan right now, especially if you know it’s going to take you a while to repay. “You borrow all the money at once and are locked into a fixed monthly payment for the entire repayment term,” says Greg McBride, Bankrate’s chief financial analyst. You can also often get a good-sized loan: “If you have a lot of equity in your home, you can potentially get a large loan, although usually the combined amount of the home equity loan and the amount you owe on your mortgage. cannot exceed 85% of the value of your home,” says Jacob Channel, senior economic analyst at Lending Tree.

The disadvantages of a home loan: You need to take the money from a home equity loan as a lump sum that you start paying back quickly, so if you don’t need all the money at once, this might not be the right option for you. Another downside to a home equity loan is that you’ll likely have to pay between 2% and 5% closing costs, according to Channel. And unlike personal loans, which tend to be processed quickly, home equity loans can take between two and six weeks to complete. And Rebell warns that with this option, you’re using your home as collateral, so if you run into financial trouble and can’t make payments, your home may be at risk.

Who is a home equity loan best suited for: A home equity loan is ideal for homeowners who know how much money they need to complete a project.

Personal loan

A personal loan is a one-time cash payment from a lender that is usually repaid in monthly installments.

The advantages of the personal loan: A personal loan can offer the easiest and fastest approval, with funds able to land in your account within 72 hours. And because these loans are generally unsecured, you’re not putting your home at risk if you don’t repay (your credit, however, is another story).

The disadvantages of the personal loan: “Because it’s unsecured, the amount you can borrow will be less than what a home equity product can provide, and the interest rate will be higher,” says McBride. Channel notes that while you receive a lump sum payment and don’t necessarily need to post collateral, higher interest rates and shorter repayment terms can make monthly payments harder to keep up with. Personal loans are also subject to fees, which can average 1-8% of the total loan amount.

Who is a personal loan best suited for: Borrowers who need funds faster can consider a personal loan.

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