If a person just purchased their first ‘fixer-upper’ or they’re making improvements to their forever home, they can’t get away from the fact that home renovations take a lot of time and money. Looking into options for financing, such as home improvement loans, a HEL or HELOC means they can get the home they want and spread the cost out over a few years.

Before someone takes a hammer to the sheetrock or rips out the tub, it’s essential to understand the differences between the financing options available.

What Are The Options?

When it comes to home-related financing, the sums of money being discussed can be substantial, making it even more important to understand each product’s benefits and potential pitfalls.

Home Equity Loan (HEL)

A home equity loan is a second mortgage taken out on a property for a fixed amount.

The amount a person can borrow is based on the current equity available in their home. A HEL is a secured loan where their property is used as collateral – if they can’t meet the monthly repayments, the lender can foreclose on their property and take the proceeds of the sale to cover the money they owe them.

Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit is very similar to a HEL in that it is a loan secured against their property for an amount determined by the equity in the home.

The main difference is that it is a ‘revolving’ line of credit rather than a lump sum deposit. It works more like a credit card with money available to them up to a set limit that they can draw from, pay back and then draw from again.

The HEL and HELOC aren’t really solutions aimed at first-time homeowners or people who have bought fixer-uppers, as in those cases, there isn’t usually much equity to ‘release.’ Instead, they are more for people who have owned the property for a few years that has seen an increase in value.

Home Improvement Loan

The simplest and arguably safest option (in terms of risk to a home) for funding home renovations is to take out a home improvement loan.

Unlike the HEL and HELOC, a Home Improvement Loan is usually unsecured and doesn’t need to use their house as collateral – meaning there is no risk of foreclosure. Of course, taking out a secured home improvement loan is possible, but even then, it will be secured against an asset such as a vehicle and not a person’s home.

It provides borrowers with a lump sum of money that is paid back at a fixed, affordable amount each month over a term that suits them.

The Bottom Line

When looking at ways to finance home improvements, the best option depends entirely on a person’s financial position and how confident they are managing their budget month to month. A HEL or HELOC can give borrowers access to a more significant sum of money; a home improvement loan gives them a manageable way to make affordable repayments without the risk of their home being foreclosed on should they have trouble making a payment one month.

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