Sign up for our FREE Monthly Email Newsletter
In addition to keeping in the financial know, you may be interested in checking your credit score and report.
¹The credit scores provided under the offers described here use the Equifax Credit Score, which is a proprietary credit model developed by Equifax. The Equifax Credit Score and 3-Bureau scores are each based on the Equifax Credit Score model, but calculated using the information in your Equifax, Experian and TransUnion credit files. The Equifax Credit Score is intended for your own educational use. It is also commercially available to third parties along with numerous other credit scores and models in the marketplace. Please keep in mind third parties are likely to use a different score when evaluating your creditworthiness. Also, third parties will take into consideration items other than your credit score or information found in your credit file, such as your income.
²The Automatic Fraud Alert feature is made available to consumers by Equifax Information Services LLC and fulfilled on its behalf by Equifax Consumer Services LLC.
³Equifax Credit Report Control™ is only available while you have a current subscription to Equifax Complete Premier. Locking your credit file with Equifax Credit Report Control will prevent access to your Equifax credit file by certain third parties, such as credit grantors or other companies and agencies. Credit Report Control will not prevent access to your credit file at any other credit reporting agency, and will not prevent access to your Equifax credit file by companies like Equifax Personal Solutions which provide you with access to your credit report or credit score or monitor your credit file; Federal, state and local government agencies; companies reviewing your application for employment; companies that have a current account or relationship with you, and collection agencies acting on behalf of those whom you owe; for fraud detection and prevention purposes; and companies that wish to make pre-approved offers of credit or insurance to you. To opt out of such pre-approved offers, visit www.optoutprescreen.com/.
4We will require you to provide your payment information when you sign up and we will immediately charge your card $4.95. After that, we will charge the card $19.95 for each month you continue your subscription. You may cancel at any time; however, we do not provide partial month refunds.
Equifax® is a registered trademark and Equifax Complete™ Premier is a trademark of Equifax, Inc. © 2014, Equifax Inc., Atlanta, Georgia. All rights reserved.
When they’re done wrestling with the cost of a home renovation, most homeowners have to decide how to fund a remodeling project. And in some cases, the options can be paying for it in cash or borrowing against the equity they’ve built up in their home.
Interest rates are still historically low, and home values are punching upward, so taking out a home equity line of credit (HELOC) or home equity loan may seem like a sensible financial move.
But it’s not always.
“It really depends on your specific circumstances,” says Greg McBride, chief financial analyst for Bankrate.com. “How much equity do you have, how much are you looking to borrow, and what’s your overall debt and savings picture?”
The differences between a home equity loan and a HELOC
A home equity loan and a HELOC are similar, but they are not the same. A home equity loan is like a mortgage: It’s issued for a specific amount, and you must repay it over time with fixed monthly payments. A HELOC, on the other hand, is a line of credit that you can use as needed, up to your credit limit. With a HELOC, you’ll still make monthly payments, but you may be able to make interest-only payments for a period of time.
Here are some questions you may want to consider asking and answering if you’re currently weighing a home equity loan vs. a HELOC to fund your home remodeling project:
1. How much other debt do you have?
This may be a bitter pill for many homeowners to swallow, but if you have other debt, especially debt that carries a high interest rate, you may want to evaluate and calculate whether you have the ability to take on additional debt at all. HELOCs and home equity loans need to be paid back.
“Any time you borrow, you have to look yourself in the mirror and truly assess why it is that you’re borrowing the money,” says McBride. “If you’re borrowing money simply because you’re not able to afford it based on your earnings, or if you’re carrying credit card debt, the last thing you need to be doing is borrowing more. Focus on getting that debt down.”
Barring immediate, necessary repairs, many renovations are elective.
2. How much equity do you have in the home?
If you don’t have 20 percent equity in the home, you may want to think twice about borrowing against it. There are a few reasons for this. First, if you recently purchased the home and are still making your way to 20 percent equity, you may be paying private mortgage insurance or PMI. You may want to work toward eliminating that payment first.
Second, most lenders still want you to have some stake in the home, so many will not allow you to borrow under that 20 percent threshold (though McBride notes that some lenders are getting looser about this number).
Finally, you may want to think twice before putting yourself in a financially unstable situation if home values drop and you lose a significant amount of equity.
3. How much are you looking to borrow?
Because getting a home equity loan involves start-up costs similar to getting a mortgage—including an appraisal, an application fee, and closing costs—you may want to ensure that the amount you’re borrowing is worth the cost of borrowing it. You may also be charged additional fees for maintaining the loan.
Also remember that many home equity loans carry adjustable rates, so your monthly payment may go up and become less affordable over time.
4. How much cash do you have?
If you have a significant amount of equity in your home, but not a lot of cash—you are investing your income, for example, and are protective of your emergency fund—then getting a HELOC or home equity loan may not be a bad option. Interest rates are low, so for many, this is one of the most cost efficient ways to borrow money right now.
If you have a lot of cash (and healthy emergency savings), you may want to consider whether it’s smart to borrow unnecessarily.
5. How long will you stay in the house?
If you’re planning on selling shortly after finishing the renovations—and before you have a chance to start making a dent in the loan—then using your savings responsibly may be a viable solution. Because you’re using your home as collateral, you will generally have to pay back the loan in full when you sell and that collateral disappears. You should expect to make enough money from the sale of the home to pay back the loan or have some other means of paying it off. This also doesn’t mean you can wipe out your savings making the renovations; having some liquid cash to access for emergencies is important.
Keep in mind that HELOCs have draw periods, after which you cannot take out any more money and must begin paying back the loan in earnest. So even if you stay in your home, you must be able to repay the loan over the long term.
Always keep ROI in mind
In the end, regardless of whether you use cash or a home equity loan, make sure your enjoyment of the renovations process and its results makes the return on your investment worthwhile.
Ilyce Glink is a best-selling author, real estate columnist, and web series host. She is the managing editor of the Equifax Finance Blog and CEO of Think Glink Media. Follow her on Twitter: @Glink.
The information contained in this blog post is designed to generally educate and inform visitors to the Equifax Finance Blog. The blog posts do not give, and should not be assumed to provide, personalized tax, investment, real estate, legal, retirement, credit, personal financial, or other professional advice. Before making any financial decision, you should always consult with the appropriate professionals who can explain your options, rights, and legal responsibilities, and advise you on any tax, legal, credit, or business implications that may result from those decisions. The views and opinions expressed by the authors of blog posts are their own views and may not be the views or opinions of Equifax, Inc. and/or its affiliates.
Equifax maintains this interactive forum for education and information purposes in order to allow individuals to share their relevant knowledge and opinions with other members and visitors. We encourage you to participate in discussions about personal finance issues and other topics of interest to this community, but please read our commenting guidelines first. Equifax reserves the right to monitor postings to the forum and comments will be published at our discretion. Do you have questions or comments about your Equifax credit report or customer-service issues regarding an Equifax product? If so, please contact Equifax directly. All opinions and information expressed or shared in blog comments are solely those of the person submitting the comments, and don't necessarily represent the views of Equifax or its management.