Home improvement projects come in lots of different types, different sizes, and different prices. While there are lots of ways you can improve your home without breaking the bank, many major home renovations and home improvement projects are the type of thing you have to save up to be able to afford. Depending on the type of project you’re looking into, waiting to save up the money for the project could take years.
Whether you’re looking to build an addition to your home, renovate a kitchen, or replace all the windows in your home with new vinyl replacement windows, one option to help finance your home improvements is to use some of your home’s equity. Tapping into your home’s equity can be risky and it’s certainly not a decision to take lightly, but if you’re going to use your home’s equity to finance anything, home improvements and renovations are some of the best reasons to do so. Since many home renovations and improvements add value to your home, you’d be using your home equity to build more equity.
If you’re considering using home equity to fund a renovation, there are two main ways you can go about it: a home equity loan and a home equity line of credit (HELOC). People often think these are the same thing, but they are quite different. A home equity loan is often referred to as a second mortgage and it works very much like any other type of loan -- you’re given a lump and you repay it by making payments on it on it on a monthly basis with a fixed interest rate. HELOCs are a revolving line of credit and work more similarly to how a credit card works. With a HELOC, you’re approved to borrow a certain amount of money and you can access some or all of that amount anytime you need it. You only pay interest on it when you actually use it and when you pay off an amount you owe, you’re back to having the full original amount of your line of credit available again.
Since HELOCs are typically good for several years at a time and you only pay interest on them when you actually use them, they tend to be best if you’re working on a series of projects around the house. But if you’re looking to do one big project, a home equity loan would make more sense.
Just be aware that both options do have their drawbacks. If you’re thinking of using a home equity loan or HELOC to fund a home improvement project, it’s very important to speak to someone at your bank about how you’re planning to spend the money. They’ll help you figure out the best option for you and will fully explain all the advantages and disadvantages of the option you’re considering.