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Home Improvement Loan Options: HELOC or Home Equity Loan
By Gabriel Traverso
CMR Columnist
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Remodeling or making home improvements is one of the biggest reasons homeowners tap into their home equity. However, many homeowners are not sure of the right loan to fund their project.
Should You Refinance?
If you have equity in your home there is no reason not to take advantage and take out a loan for your home improvement plans. But how do you know which loan to choose? Eliminate the obvious: if you have a lower rate on your mortgage than today's rates, then refinancing is not the answer; just leave that loan alone. This leaves a home equity loan or Home Equity Line of Credit (HELOC) as your primary options.
Home Equity Loans vs. HELOC
A home equity loan works like a traditional second mortgage. You borrow a set dollar amount based on the equity you have in your home. The term is set and the interest rate is usually fixed. For many homeowners the interest on home equity loans is still tax deductible, but check with your tax advisor to be sure.
HELOCs, work almost like a credit card. You borrow against the equity you have in your home and set a credit limit with your lender. The primary difference with the HELOC is in how the funds are made available to you. Instead of getting the loan all at once you have access to the funds to use as you desire, just like a credit card. You borrow the funds and as you make payments the funds become yours to borrow again. The downside to the HELOC is that the interest rate isn't fixed--it's usually tied to the prime rate during the drawdown period.
Finding the Right Home Improvement Loan
Getting the right home equity loan takes some work on your part. Your home is an important investment and borrowing against what you actually own should not be taken lightly. Talk with a few lenders and get multiple offers. Ask plenty of questions and make sure you really understand your options before you borrow.
About the Author
Gabriel Traverso is a freelance writer, independent musician, and artist. He resides in Reno, NV.
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