Home Improvement Loan vs HELOC vs Home Equity Loan:
Which is right for your next home improvement project?
Types of Home Improvement Loans
As a homeowner, navigating the many financing options for your next home improvement project can feel overwhelming. Deciding on the right choice can be a challenge. Whether you’re actively exploring how to fund your upcoming project or simply curious about the options that are out there, this blog is here to guide you toward making an informed decision.
Let’s break down the facts about three popular financing methods:
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Home Improvement Loan
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HELOC (Home Equity Line of Credit)
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HELOAN (Home Equity Loan)
How does a Home Improvement Loan Differ from a HELOC or HELOAN?
What is a Home Improvement Loan?
A home improvement loan is a type of monetary loan used to fund any type of home upgrade. These types of loans are funded up-front by a third-party lender, allowing the customer to pay off the project in flexible monthly payments. To learn more about how home improvement loans work, click here.
Benefits of a Home Improvement Loan vs a HELOC/HELOAN
One of the biggest advantages of home improvement loans are their highly competitive interest rates with instant approval decisions – making them quicker to obtain. Similar to HELOANs, home improvement loans can also offer consistent, predictable monthly payments with an interest rate that will remain the same throughout the life of the loan. A huge advantage of a home improvement loan over a HELOC/HELOAN is that it is less risky, as your home is not used as collateral, and you are not utilizing any of your home’s equity. Home improvement loans can also offer a wide variety of different loan types and offerings for homeowners of various financial situations. There are also typically no application fees, annual fees, cancellation fees, and other costs associated with HELOCs and HELOANs. Home improvement loans can also be the preferred choice for financing smaller-sized projects, as HELOCs and HELOANs typically require you to borrow a mimimum of $10,000. When you have a home improvement loan from a reputable home improvement financing lender, you can also feel supported by a live team who is equipped to answer your questions, as they will most likely specialize in only home improvement loans.
What is the difference between a HELOC and a HELOAN?
What is a HELOC?
According to an article from the Consumer Financial Protection Bureau, a HELOC, or Home Equity Line of Credit, is a line of credit based on your home’s equity. The more equity you’ve built up in your home, the more money you can access via a HELOC. (Equity equals the amount your property is currently worth, minus the amount of existing mortgage on your property.) The CFPB source also states that HELOCS also have variable interest rates and therefore, your monthly payments may vary from month to month.
Pros of a HELOC
A recent Bankrate article explains that a HELOC includes the ability to use the funds as you need them, repaying only what you borrowed. This is an advantage if you wind up needing less cash than you thought. Another potential advantage of a HELOC is that tax deductibility may be possible, but is influenced by a variety of factors which are elaborated on further in the paragraph below.
Cons of a HELOC
One con about taking out a HELOC is that it is secured by your home, meaning if you fall behind on loan payments, the lender may take ownership of your property through a legal process known as foreclosure. HELOCs can take a lot of time and effort to get approved due to application fees, origination fees, appraisal fees, and additional costs. According to Bankrate, HELOCs are also usually limited to homeowners who have more than 20% equity in their home, which may not be a realistic option for young homeowners. An additional con to consider is that the balance on your HELOC reduces the equity in your home, meaning there will be less net cash on the future sale of the home. It’s also essential that you take the time to consult a tax advisor to see if you qualify for a potential tax deduction – as this advantage is not available to every individual. Lastly, many homeowners may also prefer the consistency of a fixed monthly payment, which cannot be guaranteed with a HELOC.
What is a HELOAN?
Similar to a HELOC, a HELOAN (or Home Equity Loan), is also a debt that is secured by your home and based on the homeowner’s equity in the home. Unlike a HELOC, a HELOAN can offer you an interest rate that is fixed, providing consistent monthly payments. Many also call this type of loan a “second mortgage,” as there can be closing costs associated with the loan.
Pros of a HELOAN
One advantage of a HELOAN is that it can be easier to budget for than a HELOC due to its fixed, predictable monthly payments. According to Investopedia, HELOANS have a fixed loan amount, making impulse spending less likely – which may work better for consumers who are prone to overspending.
Cons of a HELOAN
Most of the cons of HELOCs will also apply to HELOANs. For example, similar to a HELOC, a foreclosure on your home is a possibility for those who cannot make their loan payments as the debt is secured by your home. HELOANs can also come with a hefty amount of paperwork, fees, and timely effort – increasing the total cost of the project once all is said and done. Although tax deduction may still be an advantage to some, consulting a tax advisor to see if you qualify is still necessary with a HELOAN. The one con that a HELOAN does not share with a HELOC is the inconsistent monthly payments, as your monthly payments will be fixed with a HELOAN.
What type of home improvement financing is right for you?
One of the best aspects of homeownership is the freedom to explore your options and make financial decisions that best suit your personal needs. Overall, home improvement loans can be a less risky, easier, and faster way to finance your home improvement projects compared to HELOCs and HELOANs. Facing an unexpected repair or replacement can be stressful, but weighing the pros and cons of your financing options can help you feel more informed and make a financing decision that aligns best with you and your home.
If you have more questions about home improvement loans and the types of loans Watercress Financial offers, visit our Homeowners Guide to Home Improvement Loans blog to learn more!
If you’re a home improvement contractor looking to partner with a trusted financing partner that makes offering financing solutions easy, fill out our form today:
– Madison Schoppe (Marketing Coordinator)