Difference Between Home Improvement Loan & Home Equity Line of Credit
Home-improvement loans and home-equity lines of credit (HELOCs) are very similar in nature. The phrase "home improvement loan" is often a specific marketing-driven name given to what amounts to a home-equity loan. A home improvement loan, home-equity loan, or second mortgage are second amortized, secured mortgages, with your property as collateral. A HELOC is a line of credit, as opposed to an amortized loan.
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Home Improvement Loan Basics
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Home-improvement loans are typically used for renovations or other types of improvements to a residence. Common expenses financed with the loan include setup and preparation, contractor fees and building materials, according to the Home Improvement Financing Site. Banks that offer niche "home improvement loans" as opposed to the more general home-equity loans may seek more details on your use of the funds.
Home Improvement Loan Process
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Whether you are seeking a home-equity loan for use in home improvements or a specific home-improvement loan, you must complete a lender's application process. Steps usually include an assessment of your home's equity, which is based on appraised value less your current mortgage principal balance. Banks may require home-improvement estimates and financial information such as income, according to the Home Improvement Financing Site. You should also look into neighborhood home values and comparable sales.
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HELOC Basics
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A HELOC is an alternative to a home-equity loan or home-improvement loan, according to the Mortgage Loan website. Similar to a credit card or other revolving credit line, you can maintain a balance between zero and your credit limit. A HELOC is secured by your property. You make interest-only payments on the balance but have the option of paying down the principal at any time.
HELOC Considerations
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Several considerations are recommended by the Mortgage Loan website, including awareness of any "extra costs" to paying off your HELOC balance. HELOCs typically have a draw period during which you can borrow. Upon completion of the draw period (often 10 years), your remaining balance is often amortized into a monthly payment of principal and interest. Missed payments can lead to default, which puts your home at risk.
Loan Decision
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Carefully consider strengths and weaknesses of each loan type and consult with prospective lenders. Products vary by lender, as do rates and terms. Equity loans and home-improvement loans offer an amortized repayment schedule and a specific loan amount. HELOCs offer flexibility but can lead to long repayment periods and high interest costs if you do not routinely pay on principal. Any secured loan places your property at risk, so be cautious.
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References
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