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Is a Home Equity Loan Right for Your Home Improvement Plans?

Aug 18, 2007
When you buy a home, you buy the one that is closest to what you want in a home. That's good enough at first, but over time you think of things you would like to do to improve your home. A home equity loan is a natural thought, since serious home improvements are beyond most families' budget.

How much of a loan you can take out depends on the equity you have in your home. This is how much of the value of your home you do not owe on your current mortgage. The standard home equity loan has a term anywhere from 5-15 years.

If you choose a home equity loan, you will want to have a pretty good idea as to how much money you need to borrow. You will want to get enough to cover all the costs of your remodeling. Get estimates first, and don't cut your budget so close that you cannot cope with changes.

If you're not sure of what you will need, a home equity line of credit (HELOC) is another good option. Same kind of deal as a home equity loan, save that with a HELOC you can borrow just what you need when you need it. You only pay interest on that which you have actually borrowed already. This can be quite an advantage over the plain home equity loan, where you will be paying on the entire amount as soon as you take out the loan.

However, the HELOC has a big catch. Many are interest-only, and so you have a large payment due at the end of the term. Smart borrowers pay more than the minimum each month, but not everyone has that discipline.

Clearly, each has advantages and disadvantages. So how do you decide?

Step one is to think about how much flexibility you need. Do you have a solid estimate for everything? With a plain home equity loan, what you borrow is what you have available. You can't have anything more.

Step two is to look at how you will be paying the contractors. Odds are you will pay some upfront, the balance when they finish. Are you comfortable borrowing all of the money right away, paying interest on money that hasn't been paid out to the contractor yet? Or would you prefer to only pay on the money you've actually paid out already?

Step three is to consider how you plan on paying off your loan. Can you cope with paying more than the bill says is due? Can you cope with a balloon payment in a few years? Or is having a consistent amount due better for how you cope with money?

Overall, however, one variety or another of home equity loan is your best bet for when you want to pay for home improvement. The rates are typically significantly lower than what a credit card would charge you. And there's nothing like making your home exactly suit your needs.
About the Author
Stephanie Foster blogs at http://credit-blog.findcreditonline.com/ on credit-related issues. Get more information on home equity loans at her site.
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