Monday, September 21, 2020

Home Equity Loans and Home Improvement Loans: Weighing Your Options

When looking to make alterations or additions to your home there are many ways of financing the project, with loans being the most common choice.  These two types of loans are both used for having work done on your home but they have different key characteristics and are best suited for specific types of projects.

Home Equity Loan

This type of loan is collateralized by your home’s value for repairs and renovations.  Because the house is put up as collateral they have much lower interest rates, and are paid off over longer periods of time.  The borrower will lend typically 80-90% of your home’s worth as long as your loan-to-value ratio is below that number; this can be calculated by dividing the total amount being borrowed by your home’s total property value.  There is also a tax deduction available for any payments made on interest.  These are ideal for more expensive projects, especially if you want to add value to your home.  They’re also a good choice if the cost of the project is unusually high, or you’re looking for the best interest rates over a longer period of time.

Home Improvement Loan

These are personal loans given out by approved lenders to be used for home repairs and renovation.  They have a fixed shorter repayment period but much higher interest rates.  This is because there is no collateral involved.  The amount borrowed is based on the debt-to-income ratio, which is calculated by dividing your monthly expenses by your gross monthly income.  It will also vary depending on your credit score and the lender you choose.  These don’t provide a tax benefit and can be very costly if not properly budgeted for.  It’s best used towards a project meant to save money in the long run, such as fixing a leak to prevent costly water damage, rather than cosmetic alterations such as new flooring.

Which Is Right For Me?

Making financial decisions can be tricky but there are resources available to help you.  To learn more about the different options for your financial situation you may contact us directly.

Contact us at (605) 718-9820 or schedule a call and let our mortgage experts help you with your home loan.


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