by Chelsea Springli 
When it comes to tackling home improvement projects, homeowners often face the challenge of figuring out the best way to pay for them. The good news is that there are several options available for homeowners looking to upgrade their homes without straining their finances. If you have equity in your property, you might consider two common choices: a Home Equity Loan or a Line of Credit (HELOC). If you don’t have equity yet, a Home Improvement Loan is a great option. In this article, we’ll explore the differences between these financing options to help you make the best choice.
What is a Home Equity Line of Credit (HELOC)?
A Home Equity Line of Credit, or HELOC for short, empowers you to borrow money against your home’s equity, up to a predetermined percentage of its total value. Unlike a lump-sum loan, a HELOC provides access to a revolving line of credit, allowing you to withdraw funds as needed and repay them at your own pace.
Here’s how it works, let’s assume Alltru Credit Union offers a HELOC at 80% of your home’s total value. You can calculate the lendable equity by determining 80% of your home’s total value and subtracting your primary mortgage. For example, if your home is valued at $250,000, 80% equity would be $200,000. Subtracting your first mortgage of $150,000 leaves you with $50,000 of available equity.
What is a Home Equity Loan?
A Home Equity Loan refers to a loan based on the equity an owner has in a property. After assessing the value of the loan, the borrower has the option to borrow up to a percentage of the total value, minus any first lien mortgage. The exact percentage you may borrow depends on your credit history and other factors. A Home Equity Loan is a great option for people who need flexibility as you can use the funds for home improvement projects, debt consolidation, education expenses, medical expenses and more.
What is a Home Improvement Loan?
A no-equity Home Improvement Loan, also known as an unsecured home improvement loan, is a financing option that doesn’t require you to have substantial equity in your home. Traditional home equity loans and lines of credit are secured by your property, meaning they put your home at risk if you can’t make the payments. In contrast, no equity loans are unsecured, so you don’t need to use your home as collateral. At Alltru, we understand the importance that this flexibility offers for homeowners who don’t have equity in their homes yet when a need arises.
To get a baseline of how much equity you have in your home, subtract the amount you owe on all loans secured by your house from its appraised value.
| Home Equity Loan | HELOC | No Equity Home Improvement Loan | |
| Secured or Unsecured | Secured (by home) | Secured (by home) | Unsecured (not tied to home) |
| Interest Rate Type | Fixed | Variable | Fixed |
| Payment Structure | Fixed monthly payments | Variable monthly payments | Fixed monthly payments |
| Funds Disbursement | Lump sum | Revolving line of credit | Lump sum |
| Interest Deductibility | Usually tax-deductible | Usually tax-deductible | May not be tax-deductible |
| Typical Use | Major one-time expenses | Ongoing or as needed | Home improvement projects |
| Flexibility in Borrowing | Limited to loan amount | Reusable credit line | Limited to loan amount |
| Loan Term | Up to 15 Years | Up to 25 Years | Up to 15 Years |
| Loan Amount | $10,000 minimum | From $10,000 to $200,000 | From $2,500 to $25,000 |
| Interest Rate Variability | Fixed rate | Variable rate | Fixed rate |
| Loan Approval Criteria | Credit and home equity | Credit and home equity | Credit and income |
| Suitable for Various Projects | Yes | Yes | Yes |
| Time to Access Funds | Can take longer due to home appraisal | Quick access to credit line | Typically faster |
Which Home Loan is Right for You?
Ultimately, the choice between a Home Equity Loan, HELOC, or Home Improvement Loan depends on your financial situation and what you need the funds for.
Upgrade Your Home Today
Taking out any loan is a serious decision. While it comes with many benefits, it’s only natural that you should have questions before you make a move that involves your home. With multiple options available, you may need some advice and insight to figure out which loan meets your specific needs. Taking the time to do your research and conducting a thorough financial evaluation with a trusted lender is the best way to ensure you make a solid decision.
As a newer homeowner who wants to make some renovations, I’m opting for a Home Improvement Loan since I don’t have a lot of equity yet. Your situation may be different.
Our team at Alltru is ready to answer your questions and ask the thought providing questions that will help you make a sound decision.
