Doing home repairs can turn out to be very expensive, and you may find yourself paying upwards of $100,000 for the project in some cases. In such instances, funding becomes one of the major issues you have to deal with. By far, one of the best ways of funding such a project would be through the use of a home equity loan or line of credit. However, the fact that most people don’t know much about them means that they end up being underused. This is despite the fact that this method of funding can turn out to be one of the cheapest given the large sums of money you can get out of it.
What are they?
For you to benefit from a home equity loan, you would first need to understand what it is. The best way to describe it would be as a loan type where you use the value of the home as collateral. In this case, the net value of the home is what is known as equity. By getting such a loan, it means that if you don’t pay the loan according to the agreement, the lender will repossess the home in order to recover the loan. This calls for careful consideration of details before choosing to apply for it.
What are the benefits of using a home equity loan to finance a remodel?
The most prominent advantage of using this line of credit is the fact that you can get large sums of money, and usually in a lump sum. The limit is usually dictated by the value of the home, as well as the presence of any outstanding loans such as mortgages attributable to the home. In addition to that, it’s usually easier to get the money this way compared to using other lenders, such as your bank. Most lenders will process the loan application in a day or two, which means that you can start the renovation as soon as possible.
What do you need to apply for one?
There are several issues that might affect the ease with which you can get the home equity loan. The most important of these is your credit score. If you have impeccable credit, you will find it much easier to apply for the loan even if you have other outstanding ones such as a mortgage that you are still paying off. However, this does not mean that you can’t get the loan when you have bad credit. There are some lenders who will be willing to give you the home equity loan even with bad credit, but you should expect to have lower loan limits as well as higher interest rates from them.
A common question that most people have is: will you be able to apply for the credit if you still have a mortgage on the home? This normally depends on the state of the mortgage. For instance, if you have just bought the home and have just started paying the mortgage, it might be difficult for you to get this type of funding. However, if you have been servicing the mortgage for a few years without any difficulty, it should not be hard to get the home equity loan.
The outstanding mortgage amount can affect how much you can apply for. If the ratio between the loan and the value of the home is very high, you are likely to be more severely limited as to how much you can borrow.
If you currently have a mortgage on the home and are interested in refinancing to cover the cost of renovations, it might be easier to get the loan from the company that you got the mortgage from in the first place. However, you should always explore the options you have first.
You will be expected to repay the loan in monthly instalments. The amount of time given for this is usually shorter than that for a regular mortgage, since the amounts involved are usually lower. However, you can always negotiate this with the lender.
A classic mistake that you should avoid when doing this is pushing yourself past your limits. Always consider how much you can afford to pay each month, and then come up with a repayment plan that can accommodate this. Most people tend to choose very short repayment periods, opting to suffer for a shorter time so as to pay off the loan sooner. The problem with this is that in some cases, it can put your finances in a very poor state.
In summary, if you are thinking of renovating your home and the issue of cost is bothering you, you should consider using a home equity loan to fund the project. This is one of the best ways of doing it provided that you make your decisions carefully.