Does the term “home equity loan” instantly paint a picture of a lavish kitchen remodel in your mind? While a loan secured by your home’s equity is a great solution for a dream home renovation, the different types of loans backed by home equity and what you can attribute the funds to are sometimes overlooked.
It’s important to first establish the difference between a home equity loan and a home equity line of credit (also known as HELOC). Both forms of loans are commonly referred to as “second mortgages” and work by borrowing against the available equity in your home. Home equity loans are given by lenders as “lump sums”, where you borrow a certain amount and are provided with specific rates and terms to pay the loan back. HELOCs, like credit cards, are revolving lines of credit that you can use over a set amount of time whenever you need them. You are only expected to pay back what you use, plus interest.
Now that we’ve covered the different types of loans you can take out using your home’s equity, let’s dive into what you can fund with them.
Home Renovations
Since home equity loans and HELOCs are secured loans, they’re an affordable option if you’re looking to take out funds to pay for a home renovation. And while both types of loans are based on your home’s equity (the portion of your home that you’ve already paid off), your choice between a home equity loan and HELOC might depend on the home renovation project you have in mind.
For example, if you are considering a full bathroom remodel and have a general idea of the project’s price range, a lump sum of funds (home equity loan) has you covered. But if you’d like to finance minor projects down the road, and maybe even a handful of other expenses, a HELOC gives you the flexibility to use whatever you need, when you need it. With either, the renovations you choose to attribute the funds toward can also help increase your home’s return on investment (ROI).
Debt Consolidation
While debt comes in many forms, it’s easy to overlook the high interest rates and unreasonable terms that make paying off loans even more difficult. Many of the loan types that can sometimes cause financial hardship down the line are due to the fact that they are unsecured — loans that are not protected by a guarantor. The most common example is a credit card. Because of this, rates are higher and can lead to unmanageable payments.
A secured home equity loan or HELOC can be a solution for anyone looking to consolidate their debt into one monthly payment. The same benefits apply when it comes to receiving cash for debt consolidation, too. Pay off debt with a lump sum backed by your home’s equity (home equity loan) or a secured revolving line of credit that you can withdraw from over time (HELOC).
Major Purchases and More
Again, one of the biggest perks of borrowing against your home’s equity is that the loan is secured by what you own, and therefore tends to come with more affordable interest rates. If you need cash now or in the future to fund a major purchase (college tuition, wedding, car or boat, any unforeseen expense, etc.), home equity financing could help you save in the long run.
Personal loans and credit cards typically come with pretty high interest rates, and adding interest to what you already owe can put anyone into a deep hole of debt. You can pay for what you need immediately or over time, without having to worry about interest rates that make returning what you borrowed nearly impossible.
Learn more about how you can fund a home project, consolidate bills, or cover a major purchase with the help of a home equity loan or HELOC at Members 1st today.