Financing a Home Renovation with a Home Equity Loan

Q: I’m doing some home renovations this spring, and I’m not sure how to finance it all. Do I take out a loan? Should I just charge all the expenses to my credit card? There are so many options! Which one makes the most sense for my finances?

A: Whether you’re gutting your entire kitchen or only springing for a fresh coat of paint and new fixtures, we’ve got you covered. As a member of Abri Credit Union, you have several options when it comes to funding a home renovation. One of the best ways to fund a home renovation is by taking out a HEL, or a Home Equity Loan. Let’s take a closer look at this popular loan and its many benefits.

What is a home equity loan? 

A home equity loan is a loan secured by the value of a home. This means the home serves as collateral for the loan and guarantees the funds borrowed.

When borrowers open a HEL, they will receive a fixed amount of cash in one lump sum. The amount they will qualify for is calculated according to the home’s loan-to-value (LTV) ratio, payment term, income, and credit history. Most home equity loans, including those offered at Abri Credit Union, have a fixed interest rate, a fixed term, and a fixed monthly payment.

What are the advantages of a home equity loan? 

The primary benefit a HEL has over other loans, including the HELOC, is its fixed interest rate. This means the borrower knows exactly how much the monthly payment will be for the entire life of the loan, making budgeting for the payments easier. This is especially beneficial in an environment of rising interest rates since the borrower’s loan is not subject to the increasing rates of adjustable loans. Here at Abri Credit Union, the interest rates on our home equity loans start at just 5.78% APR.

Another benefit of a home equity loan is its consistent repayment plan throughout the life of the loan. Some loans even allow borrowers to pay back larger sums if they choose, though many will charge a penalty for early payments. Regardless of the lender’s policy, at the end of the loan term, the entire amount due will be paid up. At Abri Credit Union, there is a fee for early repayment. If you pay off your loan within two years, it is a $250 early closure fee. The $250 fee reimburses the credit union for fees we paid upfront for you when you closed on your loan.

Are there any disadvantages of a home equity loan?

While a home equity loan offers borrowers access to the funds needed to cover home improvement projects with an affordable repayment plan, it’s important to know about every aspect of a HEL before applying.

Here’s what you need to know:

Taking out a HEL means paying several fees for the privilege of borrowing money against the home. It’s best to find out about these fees and how much they will amount to in total before applying for a loan.

Also, when opening a home equity loan, borrowers will receive all the funds in one shot. This makes a home equity loan a great option for homeowners who know exactly what kind of work they will do on their homes and the estimated total costs for that work.

If you only have a vague idea about which renovations you’ll do and how much they will cost, you may end up borrowing an insufficient amount of money.

Finally, borrowers will need to make a monthly payment on the loan, regardless of their financial standing at the time. If they default on the loan, they may lose their house. Because of that, before taking out a home equity loan, borrowers should make sure they can afford the monthly payments on the loan.

Call 866-469-6228, make an appointment, or stop by any Abri Credit Union branch to learn more about home equity loans and to start applying for your loan today.

Your new and improved home is just a loan away!