A home equity loan provides you with the liquid capital necessary to make improvements to your home. Maybe you want to expand your kitchen or build a mother-in-law suite over the garage. Whatever the case, home equity loans trump home improvement loans in many respects, but they require a strategic approach.
Understanding Home Equity Loans
Home equity loans (similar to second mortgages) provide homeowners with the cash needed to fund necessary expenses based on the available equity in the home. Most equity loans feature an adjustable-rate interest calculation with lower interest rates than primary mortgages, according to Investopedia.
When lenders consider your application for a home equity loan, they discount the money owed on the house. Only the equity you've built in the home remains available for a loan or line of credit, so homeowners who find themselves upside-down in their mortgages won't qualify for equity loans.
Unlike home improvement loans, borrowers do not have to specify how they're going to use the money they borrow. You don't have to prepare detailed estimates for supplies, materials, labor and other expenses associated with your home improvement project. This provides you with some flexibility as you work on your house.
Applying for a Home Equity Loan
When you're ready to start your home improvement project, you should research several different lenders to find the best home equity loan for your needs. Top-rated lenders like LendingTree, Citibank, and Wells Fargo offer quality customer support, favorable interest rates and fees, and advice for borrowers.
You should never apply for a loan before checking your credit. Resolve any discrepancies on your credit report so lenders see your actual score and history. An inaccurate representation of your available credit, total debt or unsatisfactory accounts could jeopardize your ability to qualify.
You should avoid applying for multiple home equity loans. Each application triggers a hard pull on your credit report, which lowers your credit score and makes you less attractive to lenders. Instead, conduct research before you apply so you know which company appeals to you most.
Requesting an Equity Loan Amount
Most lenders allow homeowners to borrow between 80 and 90 percent of their total home equity. If you own a house worth $200,000 and the amount owed on your existing mortgage totals $100,000, you could potentially borrow between $80,000 and $90,000 for your home improvement project.
However, you shouldn't borrow the total amount available to you if your project doesn't require it. Instead, work up a total budget for your home improvements so you know exactly what you need. The extra mortgage payment might stretch your budget much tighter, so keep in mind what you can afford.
Choosing Between Loans and Lines of Credit
Your home equity makes two types of revenue generation available. Loans supply you with a fixed sum of cash upfront, while lines of credit work more like credit cards, allowing you to tap into the available money up to your limit. You might prefer a HELOC (home equity line of credit) over a loan because home improvement project estimations rarely match the end total exactly.
Ask your lender about both mortgage products. You might discover that a home equity loan provides the better interest rate, for example, in which case you might want to sacrifice flexibility in favor of lower monthly payments.
Using a Home Improvement Loan
As mentioned, loans for home improvement that you obtain through property equity do not require you to use the money for a specific purpose. However, because your home should not behave like an ATM, you should always earmark the loan amount for a specific purpose and use it accordingly. If you complete your project under budget, you can use the remaining cash to pay off the loan early.
Paying Back a Home Equity Loan
Once you get a home equity loan, create a budget to make sure you pay it back on time. Your home secures an equity loan just like with a primary mortgage. If you default, the bank can sell your home to recoup its losses. Make paying off your home equity loan as much a priority as your other household bills.
Learning how to get a home improvement loan provides you with power when you want to make upgrades to your house. You should conduct thorough research into multiple lenders, and then create a home improvement budget based on professional estimates.