As we head into spring, you may be looking to secure a home renovation loan to fix what Mother Nature damaged this winter. With low temperatures and heavy precipitation, this past winter has left more than a few homes with weaker roofs, broken gutters, deteriorating windows, or frozen pipes. (Or, in a worst-case scenario, all the above!)
While it may feel overwhelming to finance repairs to a collapsed roof or flooding, you have options when you unlock the equity in your home and put it to work for you.
Types of Home Renovation Loans
There are several types of home renovation loans to consider, including:
Home Equity Line of Credit (HELOC)
A HELOC is a line of credit. You qualify for a certain amount of funds based on the value of your home, as well as other factors. It works like a credit card. You use it when you need it, pay the balance as you go, and can continue withdrawing funds as needed.
The time you can use this line of credit, usually between five and ten years, is called the “draw period.” You generally only have to pay interest monthly on the money you’ve used during the draw period, but you can make extra payments toward the principal if you want to. When you pay off some of the principal, the money goes back to your line of credit, giving you more money to use. Most HELOCs have a variable interest rate, meaning your monthly payment could change as the rate goes up or down.
After the draw period is over, you can no longer borrow the money. Instead, you enter a repayment period where you start paying back the balance owed for 10 to 20 years until the balance is paid in full.
Home Equity Loan
Sometimes called a second mortgage, a home equity loan allows you to borrow a lump sum against the equity in your home. These loans have fixed interest rates and monthly payments, with five to 20-year terms.
With this type of loan, you’ll begin payments immediately, and your monthly payment doesn’t change. It’s important to note that a Home Equity Loan adds a second monthly payment to your budget, independent from your original mortgage.
(Greater Nevada Mortgage does not offer home equity loans, but we offer a HELOC option.)
While a HELOC and Home Equity Loan allow you to borrow against the current value of your home, a RenoFi Home Renovation Loan will enable you to borrow against the future value of your home after repairs or renovation. This type of loan can give people who have lived in their homes for less than 10 years more money to borrow for repairs or renovations. It works like a home equity loan and will add a second monthly payment to your budget, separate from your first mortgage payment.
HELOC v. Home Equity Loan v. RenoFi Loan
While these three types of home renovation have elements in common, there are several significant differences.
- A HELOC is a revolving line of credit, whereas a home equity loan or a RenoFi is a fixed loan amount, rate, and payment where you receive your entire balance at the time of funding.
- With a HELOC, you only pay interest on the money you’ve drawn. As you repay the balance, the money is available to you again if you need it during the draw period.
- A HELOC typically has a variable rate, whereas a home equity loan or RenoFi has a fixed rate. As you repay your HELOC, your interest rate will continue to fluctuate with the market.
All are options to consider if you’re trying to renovate or repair your home, and each has benefits. Ultimately, the right home loan is the one that fits your needs as a homeowner.[JA1]
Choosing the Right Loan to Fix Your Home
The right choice for you will be dependent on your renovation goals. If you know exactly what you need the funds for and don’t need flexibility, a home equity loan could be right for you.
On the other hand, if you’re looking for a more flexible way to borrow money, a HELOC is the better option. Fixing the damage that winter caused to your home will likely be a more flexible, ongoing process. With a HELOC, you can repair any damage to your home while taking on whatever other renovation—or life—project you can dream up.
If you’re looking to fund home repairs now that spring is on the horizon, a HELOC could be a helpful financing option. Contact a mortgage consultant today to see if this is the right home renovation loan for you.