VOL. 129 | NO. 104 | Thursday, May 29, 2014
Know Your Options for Financing Major Home Upgrades
LISA FOLEY | Special to The Daily News
American Housing Month, recognized each June, is an opportunity for individuals to better understand the process of buying a home and the benefits that come along with home ownership.
But what if you’re already a proud homeowner, and you’re looking to undertake a major reinvestment in your property? Just like when buying a home, it’s important to research before committing to any large purchase. There are a few routes available for financing a home maintenance or renovation project, and the biggest differences are interest rates and collateralization.
Two of the lowest-interest-rate options are to take out a loan or line of credit that is backed by the equity in the home. These options also may be tax deductible (consult your tax advisor).
When deciding between a home equity line of credit (HELOC) and a home equity loan, consider how you will use the funds. With a HELOC, a credit limit is established, much like a credit card. When funds are needed, the borrower draws on the line. As draws are repaid, the funds become available to reuse. With a home equity loan, there is a one-time disbursement to the borrower for the full loan amount.
Interest rates on HELOCs are often variable and tied to an index, such as prime rate, while home equity loans typically have fixed rates. Another difference is the repayment schedule. With HELOCs, the borrower is billed monthly for the interest due on the line of credit. This will vary from month to month since the interest due is based on the amount of money that has been drawn. Principal payments may be made at any time, but the principal is typically not due until maturity.
On the other hand, with an equity loan, the fixed monthly bill includes both principal and interest. Depending on how the lender calculates the monthly payment, the principal may be completely paid by maturity. For borrowers on a limited budget, the lender may allow a lower payment that does not completely pay back the principal balance. Any remaining principal balance will be due at maturity (a balloon payment). Regardless of the option chosen, when a home is being used as collateral, the borrower could possibly lose their home if payments are not made as scheduled.
While a loan or HELOC backed by a home’s equity are the two most common financing options for major home projects, there are other methods, such as putting up a CD, an investment account or even a car for collateral. Some lenders offer personal loans, but the interest rates are typically 10 percent or more. The least expensive option is saving in advance and paying from savings.
Look at an online loan calculator to consider how interest and loan terms will affect your payments; calculators are available at MyMoney.gov. Ask your banker questions, and make sure your credit is in a good place (at least 680). This June, put in the research, and you’ll make a financial decision you can feel good about.
Lisa Foley is an executive vice president at Magna Bank and oversees the bank’s retail branches and retail products.