When considering financing options for large ticket items like home remodeling, most people gravitate toward personal loans or credit cards. However, depending on your financial situation, two other related options that could be right for you are HELOCs, Home Equity Lines of Credit, and HELs, Home Equity Loans.
Unlike traditional personal loans, HELOCs and HELs are secured lines of credit, where the collateral is the equity in your property.
HELs Vs. HELOCs
It’s important to understand first and foremost that the equity of your home is not the same to the value of your home or the balance on your mortgage.
HELs are sometimes referred to as second mortgages, as they are essentially taking out another mortgage on your property. The difference is that unlike your primary mortgage, a HEL is based on the equity of the home within the current market and not the price of the home.
HELOCs are almost identical to HELs, but for the fact that the loan amount is extended to the borrower as credit.
In other words, if the credit remains unused, you do not pay. It provides the flexibility to write a check accessing the available credit.
Although the flexibility granted by HELOCs may be overwhelmingly appealing, Quizzle public relations specialist Jess Gonard reminds, “Your lender can freeze your credit essentially at any time. They can decrease your balance or even take away the HELOC completely. And they can do this if your credit report changes drastically or your financial situation changes drastically. It’s all up to their discretion.”
Because of this, it may be advisable to consider HELs over HELOCs if your ultimate goal is a substantial percentage of your home’s equity. While there is no hard fast rule regarding what you can use your HELs or HELOCs for, these options are particularly appealing for home remodeling or renovations that will implicitly increase the equity of your home over time.
3 Things To Consider
Before making such a huge financial decision as taking out against your home equity, it is imperative to understand the gravity of the move. Make sure you really grasp what the loan or line of credit entails, taking into consideration the amount of time/due date of the loan, the interest rates and the motivations behind the decision.
- Use The Money For A Single Purpose, And Ideally Not To Pay Off Other Debts: While other uses of the money may be appealing, it is prudent to restrict the loan or line of credit to one project and not, for example, use some of it to pay off high-interest credit card debt. Borrowing against your equity to pay off other debts, particularly revolving, unsecured debts creates a recipe for mishandling and out-of-control misuse.
- The Amount You Borrow For A HEL Or HELOC Is Easily Calculable: Equity – (0.2 x Home Price) = Borrowable Amount. Said another way, if your home is worth $500,000 with $300,000 equity, lenders require that 20 percent of the home price to remain untouched ($100,000, in this scenario). Therefore, you can apply for up to $200,000 (equity of $300,000 – $100,000 untouched = available to borrow).
- There Are Tax Benefits For HELs And HELOCs, Especially If Used For Home Improvements: 100 percent of the interest for home improvements, remodeling and renovations can be deducted by law up to $1 million. Similarly, you can deduct interest of up to $100,000 for any purpose at all. Both of these provide substantial cost savings when weighed against other loan options.
Do you know how many tax benefits are available just through home ownership? Quizzle shares a few here.
Remember there are options available to make your financial dreams a reality, and with the proper guidance and dedication, those tools are easily accessible. You have ability to make those dreams come true. Invest in yourself. Educate yourself. Choose personal financial literacy and seize control over your financial future today.