What type of loan is best for home improvement projects?

Posted by  on Sep 25, 2014

Q: We're looking at doing a bunch of home improvement projects over the next two or three years. Am I better off getting a home equity loan from the start to cover everything, or trying to get a home equity line of credit so we can just tap into it when we get to each project?

A: To some extent, this comes down to mortgage quotes -- if there is a substantial difference in the mortgage rates you are quoted for each type of loan, that might sway you one way or another. Beyond that, though, there is an argument to be made for each of these types of home loans:

  • With a home equity line of credit, you can access the money as needed, so you won't pay interest on one big lump sum from the day you start your projects. Besides helping with timing, this might also help you better match your borrowing with the actual amounts you end up needing.
  • With a home equity loan, you have more certainty. You can lock in your interest rate, and make sure from the start you have secured all the money you are going to need. Also, having to budget the series of projects up front might force you to stick to a more disciplined budget, as opposed to having a flexible pool of credit available which might tempt you to add on more spending than you originally intended.

To some extent, this is a choice between cost effectiveness and risk. If all goes well, the HELOC could be the more cost-effective solution because it more closely matches your borrowing to your needs. However, this approach also means running the risk of seeing your payments swell up because of rising interest rates and/or over-spending. If you can plan the projects so they happen in a fairly condensed time frame, getting the money up front via a home equity loan may allow you to limit your risk without paying too much extra interest.

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