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Funding Home Improvement With Home Equity

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home-equity-loan-basicsHow To Withdraw Equity For Home Improvement

It may be that you are purchasing a property that needs renovation or perhaps you want to give your existing home a tune up. The cost of doing major renovations is likely to be too high for you to fund it out of pocket, so what do you do?

The obvious answer is to borrow the cash and let’s make the assumption here that you don’t have a family member who is willing to lend to you. The answer is to call on the financial services industry to give you what could amount to a sum that rises well into five figures.

Loan Or Line Of Credit

One of the priorities to consider will be the rate of interest at which you borrow so take advantage of secured lending because of the lower interest rate than that of credit cards or unsecured lines of credit. You will be applying to a bank or finance company for a second or junior loan secured against the property that you are renovating; these loans come in two main varieties: Home equity loans and lines of credit.

The home equity loan is a junior loan that dispenses a lump sum at the start of the term, which means of course that you will pay interest on the entire amount from beginning to end. The second option, the home equity loan (HELOC) allows you to draw funds against the line of credit as and when you need to use them to support the progress of your project.

A HELOC only requires that you pay interest on the portion of the line that you withdraw them, which saves cost for you on interest payments; it gives you the flexibility to use as much or little of the line of credit as you might choose. It is worth noting that this facility usually carries an adjustable rate of interest. However, you have the advantage of being able to draw the funds, repay the balance, and then advance cash again, as many times as you may require completing the project.

It Is All About The Numbers

Home equity loans command a higher rate of interest than HELOCs; you advance the full amount, and then you pay a fixed interest rate on the outstanding balance. If your renovation plan calls for an exceptionally high level of funding, other options such as cash-out refinancing or refinancing with an FHA 203(k) home loan might be preferable. These options are suitable for projects that require $100,000 or more.

Withdrawing the equity from your home or investment property is something to do only after careful consideration and only for purposes such as renovations that directly improve the value of the asset by at least the amount that you draw from it. Done correctly, borrowing against your property to improve it can be an excellent way to increase your equity, and therefore your wealth.

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Trace Richardson has written 665 articles on Sample Mortgage Inc.

I'm Trace Richardson and am the founder of LeadPress. I’m a licensed California Real Estate broker and a former equities trader previously holding the Series 7, 63, 55 and 24 securities licenses.

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