Home Equity Line of Credit: Should you renovate your home?
Building or making improvements to your home can be a tough choice. Comparing both methods is a great place to start!
Today we face a tense housing market across Sheboygan County with interest rates rising and limited available inventory. Therefore, some turn to building a new home or updating their current houses rather than purchasing an existing one.
While neither of these options is necessarily cheap, they provide existing and prospective homeowners with the control and flexibility to create their dream home without having to navigate the current housing market.
So, if you’re wondering whether you should take out a construction loan to build a new house or a home equity line of credit or loan to update your current home, we will dig into the pros and cons of each option and how you can decide if either of these routes is a good fit for you.
Securing a Construction Loan to Build a New Home
If you decide that it’s the right time to build a new home from the ground up, you may want to consider applying for a construction loan. Construction loans are approved to fund specific construction projects, like building a home or making major renovations to an existing property.
Once a borrower is approved, rather than receive all of the funds upfront like with a traditional loan, they will draw out portions of the loan throughout the construction process to pay the builders as various milestones are met.
At Waldo State Bank, our construction loans are secured. They can be competitive and require a good credit score to qualify, in addition to a healthy down payment and good debt-to-income ratio.
Most banks and credit unions offer home construction loans, so you can find the right lender near you who will guide you through the process and advise you on their specific requirements.
Pros of Construction Loans
- Unlike most banks that have a set of numbers of draws you can make; we allow borrowers to use funds as needed no matter how many draws that takes.
- Using funds as needed could be savings in interest.
- The potential of a lower interest rate compared to traditional mortgages
Cons of Construction Loans
- Monthly payments could be higher
- The loan amount is set before the project begins, providing little flexibility for unexpected costs.
Using Home Equity to Update an Existing Home
If it doesn’t make sense for you to buy or build a home right now, you may consider upgrading your current house. The good news is that updating your home doesn’t restrict you to pay out-of-pocket. Instead, you can use the equity already in your home through a home equity line of credit or with home equity loans. Essentially, these two funding routes use your home’s equity as collateral.
On the one hand, a home equity line of credit works similarly to a credit card. You can draw on the available balance when funds are needed on a credit line. Typically, you only pay interest on the amount you’ve withdrawn.
In contrast, home equity loans work much like traditional loans. Once approved, you’ll receive a lump-sum amount of money to fund your renovation project. This amount will be paid back monthly at a fixed interest rate over a set repayment period.
Pros of a Home Equity Line of Credit
- You can find competitive interest rates because the funding is secured to your home's equity.
- There is typically a more extended repayment period with this option, which can cause lower monthly payments
Cons of a Home Equity Line of Credit
- Because of the extended repayment period, interest costs over the long term can be higher.
- Funding is limited to the amount of equity in your home.
- Defaulting on repayment can put your home at risk.
An additional note to consider is that even though funding may be limited to the equity within your home, we can also do an “upon completion” appraisal. This allows us to find out how much equity will be in your home after the major project is complete.
To learn more about the difference between home equity loans and home equity line of credits, read our blog “Home Equity Line of Credit and Home Equity Loans.”
What’s Better: Construction Loans or Home Equity Loans/Lines of Credit?
When comparing the two options, there is no better option here. Each of these types of financing will be used in different situations, so it’s essential to know when they should be utilized and the pros and cons of each.
Whether you decide to build a new home or make significant renovations to your current house, you will most likely require financing to get the job done. So, knowing the available options, you have to fund your project can help you be better prepared for the process and be one step closer to enjoying your dream home.
At Waldo State Bank, we’re here to help you reach your financial goals. So whether you’re choosing to build or renovate, contact our loan specialists to help you get started!