Your financial situation is the key factor that determines which loans are suitable for you, therefore, having to decide between applying for a home equity loan and a home improvement loan shouldn’t be a dilemma for most people. Ultimately, your application is based on what you want to accomplish with those loans.
Creditors take great interest in your purpose for seeking loans. As a homeowner looking to renovate his home, there are two types of loans you can apply for: a home equity line of credit and a home improvement loan. You can qualify for either one depending on your credit history and application file.
The Purpose of a Home Equity Loan
A home equity loan serves a variety of purposes including home improvement and renovation and paying off high-interest rate on college tuition. What makes home equity a good source of loan for the lenders is the fact that your equity goes up with the amount of money you pay off (mortgage). The down payment and including all mortgage payments you’ve made up to date bring up your equity. This makes for a strong collateral.Home equity is the most valuable asset of a person and it must be used wisely. Since your home serves as collateral for the loan, you run a major risk of losing your home to foreclosure if you’re unable to pay off the debt. But on the flip side, getting approved for a home equity line of credit is relatively easy.
Purpose of a Home Equity Line of Credit
One of the home equity benefits is that it gives you access to a lump sum of money at once. There are basically two types of home equity loans: a home equity loan and a home equity line of credit (HELOC).
This grants you access to withdraw funds as needed. It works similar to a credit card. You can borrow during the “draw period” for as long as the line of credit remains available.
What makes this loan attractive and easier to pay off is the fact that you’ll need to make a certain amount of payments on the debt during this time.
Although many may not see this as one of the HELOC advantages, it is a worthwhile feature in the run long. After your draw period ends, you’re required to pay off the debt aggressively. The HELOC process is usually simpler and has variable interest rates. Since this loan money isn’t disbursed in a lump sum over a single transaction, you may not be able to use it for purposes that require hefty investments. HELOC entails low closing costs, low-interest rates, tax advantages, and financial flexibility. If these benefits are useful to you, you can apply for this type of loan.
Home Improvement Loan Benefits and Requirements
A home improvement loan serves specific needs, hence it is offered for the purpose of improving homes such as remodeling, installing pools or other activity equipment. These type of loans don’t require collateral. This is why, when your application is being reviewed by lenders, the equity in your home isn’t taken into consideration. This is one of the main home improvement loan advantages. They, however, require you to provide a detailed plan regarding the projects you’re seeking loans for. This may involve providing specific information such as getting quotes and picture drafts from your contractor. The period to make repayments is shorter than that of the home equity loan. Home improvement loan requirements include homeowners demonstrating financial suitability, stability and adequately convincing the lenders they’re capable of paying off the debt.The legal documentation required are proof of age (passport or any other certificate from state authority), proof of residence (passport, driving license, telephone bill etc), education qualification (latest degree), salary slip for the last three months, last 6 to 12 months worth of bank statements, income tax returns for the last 3 years with profit & loss account and balance sheets that are audited by a chartered accountant. Getting approved for this loan depends on how accurately and up to the mark your application is. These loans generally have higher interest rates than equity loans.
Different Loans for Different Situations
Every person relates to the types of loans available in different ways due to different circumstances. For some of you, a certain loan might be more suitable depending on your situation. It is important to analyze your assets, budget and have a clear goal in sight. Without a goal plan, you can lose the plot and end up drowning in debt, not to mention, losing your assets in the process too. A low-interest rate on loans is a key factor that makes repayment easier, so the goal is to minimize your total interest expense and search for the lowest interest rates on loans. This gives equity credit line advantage over home improvement loans. Fixed-interest loans can go as low as 4.25%.Assuming, you have excellent credit, the lowest interest rate you can get is 3.5 to 4%. So, if you have a stable source of income, you face a lower risk of default. However, the extent of time off you’ve owned a home for should also be factored in when deciding which loan to opt for. If you haven’t owned the home for a long time, then borrowing against your home equity isn’t a wise idea. The improvement loan is a better option in this situation. Lenders tend to limit their risks and one of the ways of doing it by lowering the value of the collateral against its highest market value at the time. This ensures that they aren’t extending 100% of the market value since the value is subject to change with time. An improvement loan can spare you the possibility of losing one of your assets with a high appraisal value.