Home Equity or Home Improvement Loan
Which one is right for you?
When you decide to take out a loan for home repairs, make sure you know your options. Let's start by defining a home equity loan.
A home equity loan is an option if you need money to make home improvements, but you can also take out a home equity loan for other expenses, like a college education. The value of your home secures the loan, and you make monthly payments to the lender based on your agreed terms and rate just like a car loan or a mortgage. If you default on a home equity loan, the lender can foreclose on your home.
Your loan officer can advance the entire home equity loan to you upfront or open a home equity line of credit (HELOC). If you open a HELOC, you will have access to the funds and can access it when you need it. This way, you can pay the home improvement expenses as they arise. A benefit of the home equity is that the rates are lower than unsecured loans like a personal loan or credit card.
A home equity loan is a good option if you have equity in your home and can afford the payments for your home equity loan. These loans are affordable because the interest rates are usually the lowest you can find. Keep in mind there is more risk involved with the home equity loan since you are wagering your home if you don't make your payments.
A home improvement loan is an excellent option if you are looking to update your home. When you take out a home improvement loan, you must use the money that you borrow for a home improvement project. In this case, your home does not secure the loan, and since there isn't collateral offered by the borrower, the lender will review credit history before approving your loan. If you have a credit score below 600 and no or little positive payment history, you may want to look at repairing your credit before applying.
Home improvement loan rules change based on the financial institution. At Members Credit Union, we allow the loan to fund improvements on many different properties, including a single-family detached home, townhouse, condo, or duplex. The property must be the borrower's primary address and not be a seasonal, rental, or vacation property. During your application process, you will need to provide a quote or bid for the home project and a list of materials.
While the home improvement loan's interest rate is not as low as a home equity loan, it still beats a credit card or a personal loan rate, and you don't have to put your home up for collateral. With a home improvement loan, you make monthly fixed payments just as you would with home equity.
If you are ready to borrow money for home improvements or need to talk to a Members CU loan officer to discuss your options, give us a call at 800-951-8000. Our loan officers are available Monday to Friday from 8 to 5. If you are ready to apply for a Home Improvement Loan, you can fill out an application online whenever it is convenient for you.