Financing Options for Your Home Renovation Project

Robert Haley (RH): Two common methods are a home equity installment loan (HEIL), more commonly known as an HE loan, or a home equity line of credit (HELOC), also known as an HE line of credit. Because they are secured by the equity in your home, these loans may have much lower interest rates than unsecured debt, such as credit cards and personal loans. The amount you may borrow is a percentage of the appraised value of your home minus any liens against it, such as a mortgage.

Q: What is the difference between an HE loan and an HE line of credit?

RH: An HE loan is a fixed interest rate loan for a set amount of money secured by the equity you have in your home. Essentially, it’s a second mortgage that provides you with a lump sum upfront, which you then pay back in regular monthly installments over a set term.

An HE line of credit is also secured by the equity in your home, but instead of a lump payment you get access to an available amount of funds for a predetermined amount of time that you can use, pay off, and reuse as needed during that timeframe. Also, rather than a fixed interest rate, with a credit line you will pay a variable interest rate on any funds you access. The table below compares product types and additional differences.

Q: What factors should I consider when deciding between an HE loan and an HE line of credit?

RH: Your project timeline is one factor. With a larger project funded over time, you may save some money with an HE line of credit that allows you to hold off on borrowing funds until bills become due.

For example, by spreading out payments for a large project over the course of a full year, with an HE line of credit you can avoid paying interest on funds until they're withdrawn. It also offers repayment flexibility. You're only required to make interest payments each month, so you can choose when to boost payments to pay down your principal.

On the flip side, for something like a kitchen remodel that you'll be paying for in full within a short time span, it may make more sense to borrow a lump sum with an HE loan. You'll get all the money at once and be on a set payment schedule, which some people find makes budgeting easier. Also, HE loans usually let you lock in a fixed interest rate, which may be preferable if you anticipate rising interest rates.

Q: What other factors should I consider when financing a renovation?

RH: I urge homeowners to ask themselves, "Will the project add value to the overall property? "If not, make sure that it's something you can afford to not earn back. And finally, it's a good idea to arrange to borrow at least 10 percent more than the estimated cost of your project. Renovation projects rarely go exactly as planned, so it's always a good idea to have a buffer.