Loans for Home Renovations: What You Need to Know

Improving one’s quality of living can be as simple as improving one’s living space. This may explain why home renovations and additions are at the forefront of many homeowners’ minds. Even more appealing is that renovations and additions have the potential to increase a home’s value.

What often deters homeowners from following through with improvement projects is the price tag. While the cost of home improvements can cut into savings in no time, other options can be explored.

Two options that won’t break the bank are home equity lines of credit (HELOCs) and home equity installment loans (HEILs). Each have specific features; however, one may suit your financial needs best.

A home equity line of credit provides flexibility. Interest is due only on the money used, instead of the entire credit line limit. HELOCs also are a revolving form of credit. In other words, money used from the line can be used in the future once it is repaid. HELOC rates, which are tied to the New York Prime Rate, range from Prime + 0% APR to Prime + 2% APR.

A home equity loan, on the other hand, features a fixed interest rate and fixed monthly payment. Rates are currently as low at 4.99% APR.

So which one is best for you?

Since home equity lines of credit are tied to the New York Prime, they currently offer lower rates than home equity loans. However, that could change once the economy improves. For this reason, you may desire the certainty offered by a fixed-rate home equity loan.

A benefit provided by both HELOCs and HEILs is that they are usually tax deductible up to 100 percent of your home’s value. A financial advisor or accountant should be consulted to confirm.

When is it worth using a home equity loan or line of credit for home renovations? A key consideration is how much value the improvements will add to your home.

Improvements that will increase your home’s value include bathroom or bedroom additions or renovations. Remodeling a kitchen or building an addition that adds to your home’s square footage also can add value to your home.

Home improvements that do not add much value are swimming pools, patios and finished basements. Although they may increase marketability and make your home more appealing to a potential buyer, they will not add much value to your home in dollars.

Also take into account that additions or renovations that exceed the standards in your neighborhood could negatively impact your home’s value.

Finally, don’t overlook the total cost of making renovations. For instance, if a building permit is needed for your renovations, the municipality in which you reside could reassess your home’s property taxes. Also, check your homeowner’s insurance to ensure your home renovations will be covered in the event of a fire or other disaster. Be aware that your insurance company may increase your annual premium.