Home Improvement Loans

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Home Improvement: What Kind of Loan is Best for You?

Many homeowners looking for cash to remodel their homes use the equity in their house to fund the renovation. Borrowers refinance their existing mortgages or take out home improvement loans as second mortgages. With so many options for home improvement loans available, how do you determine which loan choice is best for you?

First, figure out what type of home loan and interest rate you now have. If you have a long-term mortgage (such as a 30-year fixed rate mortgage) at a good interest rate, you should carefully consider your options. Home improvement loans are often second mortgages, such as home equity lines of credit (HELOCs) or home equity loans. These second mortgages can offer cash quickly and more cheaply than a cash-out refinance of your first mortgage.

Key points to remember about the home equity line of credit (HELOC):

  • The interest rate is variable and based on the prime rate.
  • Interest is paid on the amount drawn, not the amount borrowed. For example, if you have a $100,000 HELOC and you draw out $70,000 for home improvements, you only pay interest on the $70,000.
  • HELOC payments are interest-only for the first 10 years and then amortized fully for the following 20 years.
  • Many lenders now offer "no-cost" HELOCs, saving the borrower thousands in closing costs.
  • Many lenders will now allow you to fix the interest rate on all, or a portion, of the amount borrowed against your home equity line at no charge.

Key points to remember about a home equity loan:

  • The interest rate is fixed and higher than rates on a first mortgage.
  • The loan amount is fixed, and principal and interest are paid monthly.
  • Loans are amortized as a "30 due in 15;" this means the loan is amortized over 30 years but due in 15 years. After 15 years you will have a balloon payment, meaning you have to pay the loan in full.
  • Lenders are also offering "no-cost" home equity loans. Check to see if there is a difference in the interest rate charged for a "no-cost" loan.
Finally, talk to your accountant or loan advisor to see which mortgage program works best for you when considering home improvement loans.

Sheryl Landrum, Senior Loan Officer, First Capital Mortgage of San Diego, Bonsall, CA.
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