Does it ever make sense to borrow against your home's equity to do renovations on the home?
Answers | 1
A HELOC works more like a credit card. It makes a certain amount of credit available on an as-needed basis for a limited term, such as five or 10 years, followed by a repayment period of up to 20 years. It has an adjustable rate that changes with the market.
A home equity loan makes sense if you need a large amount all at once for a specific project.
A HELOC might make more sense if you need to borrow smaller amounts over a longer period.
You might be tempted to choose a HELOC because of its lower interest rate.
But since today’s interest rates have almost nowhere to go but up, a HELOC's variable interest rate could end up costing you much more over the loan term than a home equity loan’s fixed rate, even though the fixed rate is higher initially.
HELOCs have another significant drawback.
Lenders can freeze or reduce your line of credit without warning if they learn of a change in your financial circumstances or a drop in your home’s value. That means you can’t always count on a HELOC to be there when you want to use it.
For either option, you'll need to provide full documentation of income and assets. Your lender may or may not require an on-site appraisal, depending on how much you want to borrow and other factors.
To get the best interest rates with most lenders, you'll need a credit score of at least 740.
Big banks typically add the value of the home equity loan or line of credit you're seeking to the balance of your primary mortgage to see if you'll retain at least 10% to 30% equity in the property.
(Home equity is the current market value of your home minus the outstanding balance of all mortgages.)
If not, your application for a second mortgage will be turned down.
The nation’s largest credit union, on the other hand, will let qualified members borrow up to 100% of their home’s value, leaving them with zero equity.