Now that you have purchased a home, you have a variety of additional elements to consider. Do you pay off your mortgage early or refinance? Do you work on home improvement projects or dedicate that money elsewhere? The number of questions that you should address throughout your homeownership journey is nearly endless.

For those who have decided that home improvements are the proper route to take to boost the value of their residence, make it more livable and add features that are important to them, the issue then becomes financing. How do you pay for the improvements you would like to make?

The good news is that a home equity loan is one such option, but in order to understand whether this type of loan is right for your situation, you must first learn more about how it works, what it can accomplish and some of the downsides you need to prepare for.

Is A Home Equity Loan the Same As A HELOC?

A home equity loan and a home equity line of credit are often confused for one another, as both utilize the same sort of metrics regarding your home in order to provide you with the funds you need. However, the two products are different, both in application and monetary availability, so you should understand the difference between them.

A home equity loan is more commonly used for home improvement projects because it pays out in a single lump sum. It functions much the same as any other type of loan: you are approved for an amount, and that amount is disbursed to you, after which you pay it back in monthly installments while also factoring in interest.

A home equity line of credit, on the other hand, is more like a credit card. You are given a limit to how much you can spend, and you may repay and re-spend within that limit as much as you like. This also has an interest rate that will be applied for any amount that is not paid off at the end of each month.

Determining Your Equity Value

In both home equity loans and lines of credit, the amount of equity that you have in your home is what determines the amount that you may spend against. Equity is calculated as the difference between your home’s value and what you still owe on it.

For example, if you purchased a home on a $150,000 mortgage that you have paid $50,000 on, and your home is currently worth $200,000, you have $100,000 in equity. While a HELOC or equity loan will not necessarily make that full $100,000 available to you, you may be approved for as much as 70% to 80% of that amount.

Using Home Equity Loans For Home Improvements

Pros

Home equity loans are one of the most common ways to fund home improvement projects and for good reason. You have access to large amounts of cash in a lump sum, which can help you pay for those expensive projects like roofing or additions.

You can also claim the interest on an equity loan on your taxes, and by increasing the value of your home using a home equity loan, you can boost your equity without actually paying down your mortgage any further. In a way, this type of financial vehicle is utilizing the money you have already spent to greater effect.

Cons

While home equity loans are useful, there are certainly downsides to be aware of. If you take out a home equity loan when the market is up and then the value of your home decreases, you could be stuck repaying a loan that is worth more than the value of your house, leaving you with negative equity.

And of course, any loan comes with interest rates and other terms to be aware of that could be problematic if you do not consider their full impact. Thus, it is important that you thoroughly consider how such a loan will change your financial situation.

Trust The Experts To Help You Understand Your Home Financing Options

Whether you are looking to see how a home equity loan or line of credit could assist you or you need help understanding your mortgage options prior to purchasing a property, be sure to ask an expert.

The professionals at Fairfax Mortgage Investments would be happy to answer any questions that you may have to equip you with the tools you need to succeed in the financial side of home ownership. Reach out to learn more or to schedule an appointment with a professional.