Current Interest Rates On Home Equity Loans – Home renovations can be expensive. But the good news is that you don’t have to pay out of pocket. A home improvement loan allows you to finance the cost of renovations and repairs.
Specialized rehabilitation loans, such as FHA 203(k) mortgages, are available specifically to finance home improvement projects. There are also second mortgages—home equity loans and HELOCs—that can provide financing for home improvements or other purposes.
Current Interest Rates On Home Equity Loans
So, what is the best home improvement loan? It depends on your needs. Here’s what you need to know.
Home Equity Loan Vs. Line Of Credit
A home equity loan (HEL) allows you to borrow against the equity built up in your home. Your equity is calculated by taking the home’s value and the remaining balance on your existing mortgage.
Unlike a cash-out refinance, a home equity loan does not pay off your existing mortgage. If you have a mortgage, you continue to make monthly payments while you pay off your new home equity loan.
A home equity loan is “disbursed in one lump sum. It’s like a second mortgage,” said Bruce Elion, a realtor and real estate attorney.
With a home equity loan, your home is used as collateral. This means that lenders can offer lower rates because the loan is secured against the property. A low, fixed interest rate makes a home equity loan a good option if you need to borrow a large amount.
Home Equity Loan And Heloc Guide
Keep in mind that you’ll pay between 2% and 5% of the loan balance in closing costs for your home equity loan. Therefore, the amount borrowed is worth the additional cost.
As a bonus, “a home equity loan, or HELOC, can also be tax-exempt,” says Doug Lever of Tropic Financial Credit Union, a member of the FDIC. “Check with your CPA or tax advisor.”
A home equity line of credit (HELOC) is another great way to borrow against home equity without having to put down a down payment. A HELOC is similar to a home equity loan, but works more like a credit card. You can borrow from it up to the approved limit, repay and borrow from it again.
Another difference between home equity loans and HELOCs is that HELOC interest rates are adjustable; they can rise and fall over the term of the loan. But interest depends on your outstanding HELOC balance — the amount you actually borrow — and not the entire line of credit.
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You can borrow a fraction of the maximum loan amount at any time, which means your repayments and interest charges will be lower.
If you have several low-cost or long-term renovation projects to finance on an ongoing basis, a HELOC may be a better option than a home equity loan.
At the end of the period “the loan must be paid in full. Or a HELOC can be converted into an amortizing loan,” Elion says. “Note that the lender is allowed to change the terms of the loan term. This can reduce the amount you borrow if your credit goes down, for example.”
However, “HELOCs offer flexibility. You don’t need to withdraw money until you need it. The line of credit is available for up to 10 years,” Lever says.
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Another popular way to get money for a home improvement project is to refinance. With this option, you finance a new mortgage loan with a larger balance than your current debt. Then you pay off your existing mortgage and keep the rest.
The money you get from a cash-out refinance comes from your home equity. It can be used to finance home improvement projects such as basement or kitchen renovations. However, no rules specify what the money should be used for.
A cash-out refinance is usually the best home improvement loan if you can lower your mortgage rate and take the money out. This only works if the current market rates are lower than your existing rate.
You can also adjust the term length to pay off the home faster. For example, let’s say you have 20 years left on your 30-year loan. Your down payment may be a 15-year loan, which means you have to pay off your home five years in advance.
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So, how do you know if you should use a cash-out refinance? Compare closing costs over the life of the loan. That means considering the total cost of the new loan versus the cost of holding it for the life of the current mortgage.
Keep in mind that cash-out refinances have higher closing costs — and they apply to the entire loan amount, not just the cash-out. Therefore, you will probably need to find a lower interest rate than the current rate to evaluate this strategy.
With the FHA 203(k) program, you don’t have to take out two separate loans or pay closing costs twice. Instead, you finance home improvements when you buy a home.
FHA 203(k) rehab loans are great when you’re buying a fixer-upper and know you need financing for immediate home improvement projects. These loans are backed by the government, which means you’ll get special discounts — such as low down payments and the ability to apply with a less-than-perfect credit profile.
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On the other hand, this type of loan may take longer to close. “FHA 203(k) loans can be tricky to make and difficult to get approved,” says John Meyer, Mortgage Reports’ loan specialist and licensed MLO. If you go this route, it’s important to choose a lender and loan officer familiar with the 203(k) process.
If you don’t have enough home equity to borrow from, a personal loan is another way to finance home improvements.
Since a personal loan is unsecured, you don’t use your home as collateral. This means that these loans can be obtained faster than HELOCs or home equity lines of credit. In some cases, you can get a next business day loan or same day financing.
Personal loans can have adjustable or fixed rates, but they are usually higher than home equity loans or HELOCs. This means that if you have good or even excellent credit, you may be able to get a lower rate.
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The repayment period for a personal loan is less flexible, often two to five years. You will also pay closing costs.
These terms may not be entirely convenient. But personal loans are more convenient than HELOCs or home equity loans for some borrowers. If you don’t have a lot of money to borrow against your home, a personal loan may be an option to pay for home repairs.
These loans also make sense for financing home repairs—if your water heater or HVAC system needs to be replaced right away. However, Meyer cautions, personal loans are “the least recommended” for homeowners.
You can also finance some or all of the remodeling costs with plastic. This is the fastest and simplest financing option for your home improvement project. You don’t need to fill out a loan application.
Using A Home Equity Loan Or Heloc To Pay Off Your Mortgage
But home improvements often cost tens of thousands of dollars, so you should be approved for a higher credit limit. Or, you may need to use two or more credit cards. Plus, you’ll likely pay lower interest rates than home improvement loans.
If you must use a credit card to finance your renovations, try to apply for a card with a 0% APR. Some cards offer up to 18 months to repay the balance at that introductory rate. This method is useful if you can pay off your debt within this repayment period.
Like personal loans, credit cards can be accepted in an emergency. But you shouldn’t use them for long-term financing. Even if you have to use credit cards as a temporary solution, you can get a secured loan to pay off the cards later.
The best home improvement loan will fit your lifestyle and unique situation. So let’s narrow down your options with a few questions.
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If so, you can get the lowest rates by getting a home equity loan with a cash-out refinance, home equity loan, or home equity loan.
If so, consider the FHA 203(k) program. This is the only loan on our list that bundles home improvement expenses with a home purchase loan. Check with your loan officer for instructions to ensure you understand the fund’s repayment terms.
Taking out just one mortgage to cover both needs will save you money on closing costs and is ultimately a simpler process.
“The only time I recommend the FHA203(k) program is when I’m buying a fixer-upper,” Meyer says. “But I would still advise homeowners to explore other loan options.”
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When you need emergency home repairs and don’t have time to apply for a loan, you may need to consider a personal loan or even a credit card.
Keep in mind that these options have higher interest rates than secured loans. So you’ll want to
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