What's the Best Way to Finance a Home Renovation?

Is a Home Equity Loan or a HELOC a better option for my home renovation?

Whether you’re gutting your entire kitchen or turning your basement into a home theater, we’ve got you covered! As an Oregonians CU 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.

Let’s take a look at Home Equity Loans and HELOCs, and consider how they compare.

Home Equity Loan 

A Home Equity Loan is a loan that’s secured by your home's value (your home's "equity"). 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.

Pros:

1. Your rate is fixed, so it won't change over time. If market interest rates are heading upward, then this is a benefit to you because you'll be able to lock in a lower rate.
2. Again, because the rate is fixed, you don't have to worry about it going up if market rates go up; whereas with a HELOC, your rate will follow market rate changes.
3. Given your interest rate and the amount you're borrowing is fixed, your payment will be predictable each month.
4. If you need to borrow more funds, chances are you'll have to go with a Home Equity Loan. Most HELOCs have a maximum limit that's much lower than the lender will issue a Home Equity Loan for. For instance, we'll lend up to $250,000 on a Home Equity Loan, but our maximum credit limit for a HELOC is $100,000.

Cons:

1. A Home Equity Loan may have higher closing costs.
2. Receiving all the funds at once means you're paying interest from day one, even if it takes you a year to complete the project and spend the money.
3. You may find that the amount you borrowed is not enough, or too much.

Home Equity Line of Credit 

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.

Pros:

1. You can spend the money at your own pace.
2. Many lenders offer an introductory rate on a HELOC, so you may have a lower interest rate for the first six months, year, or however long the introductory period is.
3. Given a HELOC is a line of credit, the funds become available for you to use again once you've paid them back.
4. Upfront costs for HELOCs tend to be lower than Home Equity Loans.
5. 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.

Cons:

1. With a variable rate, your rate may go up if market interest rates go up.
2. Your monthly payment will change, depending on what you've spent.
3. Many lenders only require borrowers to make payments toward the interest. This may seem advantageous, but it could put you in a situation we're you only being paying back your balance once the draw period for your HELOC ends (this is usually 10 years).

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 Home Equity Loan or HELOC to more than pay for itself.  Market interest rates and your specific project needs will determine which option is better for you.