Home equity lines of credit and home improvement loans may seem similar but there are differences in how to use the loans and how the money is expended. A loan based on the value of your home is a home equity loan. A home improvement loan is either a secured or unsecured loan for home remodeling, home repairs, etc.
Applying for a home equity line of credit (“HELOC”) is based on the amount a homeowner can borrow on the equity value of their home and their credit rating. Home equity is a good financial option for funding a home repair, remodeling or improvement project. Using your home’s equity value to borrow money on it to increase the value of your home is a smart decision. Lenders generally allow a maximum line of credit that is 75 % of the equity, if a homeowner’s credit is good enough to meet a lender’s HELOC process requirements.An advantage for a HELOC is that the line of credit can be used for any reason. The type of financing a borrower chooses depends on the following:
• How long do you plan to live in your home?
• What type of home improvement project(s) are you planning?
• What is the value of the improvements to your home?
Securing a Home Improvement Loan
Home improvement loan advantages are that they can be used for any type and size of home improvements. It is like applying for a personal loan. A loan to make improvements is based on how much the renovation, repairs, or improvement plans will cost. When a homeowner applies for an improvement loan, lenders will ask for different bids which is part of the home improvement loan requirements. The loan process is as follows:
• The lender will appraise the bids for what they consider to be a reasonable price and the contractor’s licensing and work quality.
• After checking the bid price and of course your credit, the lender will approve a loan for homeowners to begin and complete your home improvement plans.
Homeowners make payments on their home equity line of credit when an application is approved. Some lenders may charge you closing costs, plus an initial interest payment. Generally, there is a 15-year repayment period. HELOC advantages when approved is based on the homeowner’s equity and their ability to repay the loan. The HELOC process requires a monthly repayment of interest-only payments determined by the homeowner. Home equity line of credit is similar to a revolving credit process. There are plans that allow homeowners to draw funds during a ‘draw period,’ which is simply a number of time homeowners can withdraw monies from a HELOC credit account. Other HELOC advantages are that at the end of this period they can renew their credit line for additional improvement funds. When applying for a HELOC read the fine lines because some lenders could ask homeowners to pay back the whole amount at the end of the draw period. Of course, proper lenders will allow borrowers to make payments over a period called the “repayment period.”
Home Improvement Repayment
An improvement loan is repaid when your project is completed, which makes it a short-term loan. As an unsecured loan, the home does not need to be collateral. Repayment for this type of loan can be made in the following manner:
• Borrowers can use the unsecured loan option or use their home’s equity for collateral.
• Borrowers can take out a first or subordinate mortgage loan.
The length of repayment can vary, generally, it is between five and 20 years, or as short as two years. An unsecured home improvement loan does not require collateral and the repayment amount will remain the same each month.