As home values have increased in VT and NH in recent years, you may have more equity in your home than you think. That capital can be borrowed with a Home Equity Line of Credit (HELOC) or a Home Equity Loan to finance home improvements and renovations. Read on to learn the differences between these two types of home financing, what they are best used for, and what to consider before applying.
Differences Between a HELOC and a Home Equity Loan
A HELOC, or home equity line of credit, is a type of loan that allows homeowners to borrow against the equity in their home. To estimate the current value of your home, subtract the balance on your mortgage (as well as any other mortgage loans) from the market value of your home.
Opening a HELOC means having access to a certain loan limit (usually up to 80% of the value of your home). HELOCs work like a credit card, where the borrower can access funds as needed, make payments toward the balance, and use the HELOC again.
A home equity loan, on the other hand, is a type of second mortgage. It is a fixed-term loan with a fixed interest rate and a fixed payment schedule.
A HELOC generally has a variable interest rate, which means that the interest rate can fluctuate over time. The interest rate on a home equity loan is fixed, which means it will stay the same for the life of the loan.
The loan limit for a HELOC is generally determined by a percentage of the home’s value and the remaining balance of the first mortgage. A home equity loan, on the other hand, is usually offered at a fixed amount. However, with both types of home equity financing, lenders generally want to leave a 20% cushion between your home loan balances/loan limit and the estimated value of your home. That protects both you and your lender from going “underwater” on your mortgage if the property’s value falls.
Borrowers can use the funds in a HELOC as needed, as long as they do not exceed the credit limit. Depending on the terms of your HELOC, you may not need to make any withdrawals right away; some homeowners use their HELOC as a type of emergency fund. With a home equity loan, the borrower receives the full amount of the loan at closing and must begin repaying it immediately.
When is a HELOC the best option for your home improvement needs?
A HELOC is a good option for home improvement projects that will take place over time, such as a kitchen remodel that will be completed in stages. The borrower can access the necessary funds for each stage of the project, instead of having to obtain a large lump sum loan up front.
For this reason, HELOCs are also a great option for tackling various small to medium-sized projects. Maybe you want to update your bathroom, get a new front door for your home, and add some recessed lighting in the living room. You don’t know exactly how much each project will cost, so a HELOC offers flexibility to pay for things as you go.
When is a home equity loan the best option for your home improvement needs?
A home equity loan is a good option for large, one-time home improvement projects. You can get a proposal for the full cost of your project, so you know how much you need to borrow. For example, if a homeowner wants to add a second story to their home, they can choose a home equity loan to access the funds they need at one time.
Home improvement projects with the best return on investment
When it comes to home renovations, return on investment (ROI) refers to the value added to the sales price of your home from a particular improvement. For example, if your home is worth $300,000 now and you spend $50,000 to remodel your kitchen, a $40,000 increase in the value of your home (to $340,000) would be an 80% ROI on your kitchen renovation.
Of course, our houses are our personal spaces. There is usually an element of personal taste or preference that goes into home improvement decisions, not just financial considerations. However, some of the best ROI for home improvement projects include:
Considerations Before Applying for a HELOC or Home Equity Loan
If you’re considering a HELOC or home equity loan to finance your next home improvement or renovation project, consider the following:
- Credit score and income: Both types of home financing require a good credit score and proof of income. The better your credit score, the more favorable terms (including interest rates) will be offered to you. Your income is used to determine if you can afford the payments on your home equity loan or HELOC.
- The value of your house: The amount you can borrow will depend on the value of your home and the amount of equity in it. Generally, you can borrow up to 80% of the value of your home.
- Current interest rates: The interest rate you get on your home equity loan or HELOC, whether fixed or variable, is based on current average rates. So if rates are low, it might be a good time to lock in a low interest rate on a home equity loan. If you think rates will drop in the future, consider a HELOC with a variable interest rate.
- Tax implications: The interest you pay on a home equity loan may be tax deductible, depending on what the funds are used for, while the interest paid on a HELOC may not. Consult with a tax professional before making a decision.
Apply for a HELOC or Home Equity Loan!
At Union Bank, we understand that home improvement projects can be exciting and overwhelming. That’s why we’re dedicated to helping Vermont and New Hampshire homeowners make informed decisions about home improvement financing options. Whether you’re looking to update your kitchen, add a deck, or do another renovation, it’s crucial to understand the differences between a HELOC and a home equity loan. With our expert guidance and a wide range of loan options, Union Bank can help you meet your home improvement goals and increase the value of your home. Don’t let confusion stop you from enjoying the excitement of a renovation or upgrade. Visit one of our locations in Fairfax, Hardwick, Berlin, Jeffersonville, Jericho, Johnson, Lyndonville, Morrisville, St. Johnsbury, Stowe, Shelburne, St Albans, Williston, Groveton, Lincoln or Littleton, or speak to one of our specialists today in loans. and discover the best home loan options for your specific needs!