Spring is just around the corner, and many homeowners are anxious to start on improvements. But without cash on hand, what’s the best way to finance your desire to catch up with basic repairs, or to turn your humble house into your dream home?
Home equity loans or lines of credit are popular choices. Both borrow against the equity in your home, and both can give you financial flexibility by putting the value of your home toward improvements, but there are important differences between a home equity loan and a home equity line of credit.
Loans are made in one lump amount and come with a fixed interest rate so that borrowers know exactly how much they’ll repay each month, whereas with a line of credit, the loan amount is put into an account, much like a checking account. Then, the borrower can withdraw money as needed for several different projects, and repayments are required only after money is taken from the line of credit. Lines of credit typically have variable interest rates, so borrowers need to pay attention to changing repayment amounts.
With both home equity loans and lines of credit, homeowners can use the equity in their homes as loan collateral, and interest rates on equity loans are generally lower than most other types of long-term loans. With lending rates expected to increase this year, a home equity loan could be a good option to pay for a remodeling project or college tuition, pay off credit cards with high interest rates, invest in a rental property or start a business.
To calculate your home equity, start by subtracting the amount still owed on the mortgage from the market value of the house. For example, if $50,000 is still owed on a house with a market value of $150,000, the equity is $100,000. Most banks only allow homeowners to borrow against a percentage of the equity.
Many financial advisors urge homeowners to be conservative in how they use home equity loans. “Basically, you should look at home equity loans as investments and not as extra cash when making spending decisions. If your intended use of the money doesn’t pay you back in some way, it’s probably not the best use of your available equity,” according to investment advice website The Motley Fool.
Katahdin Trust Company offers both home equity loans and lines of credit for uses such as home improvement, debt consolidation, mortgage refinancing, and college expenses. Homeowners can borrow up to 80 percent of their equity.
When you apply for a home equity loan, you’ll have to provide the lender with some documentation. Katahdin Trust, for example, requires your W-2 statements and signed federal income tax returns for the last two years; a list of assets; a list of liabilities, including credit card information; and documentation about how you plan to use the loan (remodeling plans and estimates, for example). The bank’s website has a full application checklist. Katahdin Trust Company is a Member FDIC, Equal Housing Lender.