Should You Take on a Home Improvement Loan?
The phrase ‘second mortgage’ has a pejorative context for most people when they hear about a friend or neighbor that has pursued one. The conversation usually centers on financial hardship or other less-than-desired motives for taking out a second mortgage on a property. However, that is certainly not the reality and, if used correctly, a second mortgage (better known as a home equity loan) can result in the fruition of home improvement desires.
Home equity loans are familiar to most homeowners. These loans are taken out on the equity you have built up in your home. Instead of a home loan that secures the debt the lender is providing by putting your home at stake, your equity in the home is instead at stake, giving you leeway to leverage the mortgage payments you have been diligently sending in for months or years.
Lenders see this kind of collateral as a way of feeling better about the risk you represent of not paying back the loan, ensuring that there is recourse should you default. This added security can benefit you through reduced interest rates, access to a greater loan amount, and other ancillary benefits specific to a particular lender. Of course, the amount of money you can borrow is limited by the amount of equity you have built up. If you’ve built up $50,000 in equity, don’t expect to be approved for a $200,000 loan.
The Home Improvement Rub
Home improvement enters the fray by presenting a second option for financing these specific types of projects. Improving an asset being used to secure a loan with the loan money is seen as a favorable situation for a lender. Not only do they get the security of knowing there is equity to fall back on, but they also get the knowledge that that asset may rise in value due to improvement efforts, making the loan an even smaller risk.
This home improvement aspect also opens up a new type of real estate financing that is simply known as a line of credit. Lines of credit are common, credit cards being the best example, but that credit is extended based solely on your ability to pay and credit history. A line of credit on your home is taken out based on the equity in your property. Just as a home equity loan puts your equity on the line, a home equity line of credit does as well.
What does this all mean? Well, it means that the money to improve your home already exists within the home itself. If you have built up a substantial amount of equity in your property and are looking to improve it, you can use that very equity to do so. You get better financing options, the ability to use a line of credit to borrow just as much money as you need, and the prospect of having a more valuable home at the end of the day, which then raises your equity.
Though these lines of credit do usually have a flexible real estate interest rate that has to contend with every few months, you can reap immense benefits from exploring the possibility. If you can take $20,000 of your line of credit to give your home an additional $40,000 of value, you have raised your equity in the home by $20,000 with the resources you already have built into the property.
While these types of financial maneuvers may seem foreign to some people and the word second mortgage can scare off a lot of potentially eager homeowners, a home equity line of credit can be a great way to get around that stigma and provide a great way to construct valuable home improvement projects with the equity you have built up in your home.