What is the Best Way to Finance a Home Renovation?

Q: I’ve heard that interest rates are increasing. If that is true, how does it impact home equity lines of credit and home equity loans?

A: It’s true interest rates have slowly increased in 2018; however, rate should not be the only factor considered when determining the right home loan product.  Whether you plan to use the funds immediately, or over a period of time, is also an important factor to be considered in your evaluation.

A HELOC is a revolving credit line that allows you to borrow money as needed. You can spend the funds however you choose.

Pros:  HELOCs allow for financial flexibility. You can withdraw money as needed over an amount of time known as the “draw period.” This is especially beneficial if you don’t know exactly how much money you’ll need.  You will only pay interest on the amount utilized.  This allows for a safety net that can be used as needed and is also helpful for renovation projects that will be paid over a period of time.  The rate may be higher but the flexibility of use may help you save on interest expense in the long term.  When the draw period ends, you will continue to make payments over another set time period to finish paying off the balance. 

Cons:  HELOCs have variable interest rates – the interest you’re paying on the loan fluctuates over the loan’s term. Monthly payments may vary as you borrow additional funds and/or interest rates fluctuate. 

A fixed home equity loan, also secured by your home’s equity, allows you to borrow a fixed amount in one lump sum. Most home equity loans have a fixed term and a fixed monthly payment.

Pros:  Home equity loans have fixed interest rates – the borrower knows exactly what their monthly payment will be for the life of the loan. In an environment of rising rates, this is especially beneficial; the loan won’t be subject to increasing rates. Every monthly payment on your loan is made up of both principal and interest. You will pay back the entire loan, in manageable amounts, until the loan term is over.

Cons:  You will begin to pay interest on the entire balance from the date of the loan.  If you are planning to use the funds from the loan over a period of time for a renovation or other purposes you may begin paying interest sooner than the funds are utilized.  If you plan to use the funds immediately, then this option may be the right one for your situation.

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*Rate listed above is fixed and is based on a 15 year term with a maximum of 80% Loan to Value (CLTV). Additional terms and products available for financing up to 100% Loan to Value (CLTV). Please see website or call the credit union for more details. Credit qualified borrowers. Rates listed above are effective as of 11/30/2018 and subject to change without notice. The rate will not increase while this plan is open. Closing costs and NYS Mortgage Tax is paid by the borrower.