by Emily Hechler 
As a homeowner, it’s natural for your house to experience wear and tear over time. To maintain your home’s value, or even increase it, you’ll want to make regular improvements. But how can you best finance these upgrades? You might have significant equity in your home but need to cover other expenses without relying on credit cards. At Alltru, we offer a variety of home loan options tailored to meet the unique needs of homeowners. In this guide, we’ll explore the differences between these loans and how you can take advantage of the funds available to you.
Types of Home Loans
HELOC stands for Home Equity Line of Credit. A line of credit works similar to a credit card. The borrower is granted a line of credit, which is how much money they can borrow up to. When you withdraw money, you must pay it back shortly thereafter. Essentially, you pay as you go. If you don’t borrow this month, then you won’t receive a bill this month. With a HELOC, the collateral backing your loan is the equity of your house. A HELOC is a great way to get fast access to your home equity but you spend it as you need it.
HELOCs have varying rates. Since you are borrowing money against the equity of your house, you have to pay interest, just like with any other loan. HELOCs often have lower introductory rates. In addition, the interest is usually tax deductible. HELOC loan terms at Alltru can be as long as 25 years. You can use the funds from your HELOC for anything home or not-home related.
A Home Equity loan is a type of loan that is also based on the equity of the home. When you borrow with a Home Equity loan, you can take up a percentage of the total value minus the mortgage. The percentage you are eligible to borrow is based on your credit history and the amount of equity you have in your home.
When you borrow with a Home Equity loan, you get a lump sum of cash up front that you will pay off over the next several years. Unlike HELOCs, Home Equity loans have fixed interest rates and a smaller loan term. Typically, homeowners use Home Equity loans for one large expense, such as renovating a kitchen or paying for medical bills. You can use the funds from your loan for a home project, but you aren’t required to.
A Home Improvement loan is a loan specifically for home improvement projects. Similar to a Home Equity loan, this type of loan has a fixed interest rate and a shorter loan term. When you get a Home Improvement loan, you will get access to your funds in a lump sum up front.
A Home Improvement loan is a great option for new or recent homeowners, as you don’t need home equity to get a Home Improvement loan. These loans are usually not tax deductible. In addition, these funds must be used for a home improvement project. Because there is no collateral required for these loans, they can be limited to a smaller loan amount.
To determine which type of loan is the best option for you, consider how much equity you have in your home. If you have little equity, a Home Improvement loan is the best option – just remember you are limited to using this money for home improvement. If you have substantial equity in your home, a Home Equity loan or HELOC may be a great option. A HELOC is a great option if you need funds continuously. If you only need a large amount of cash once, a Home Equity loan is likely the better option.
Using Home Equity for Home Expenses
If you have substantial equity built in your home, you can reinvest that money back into your home to complete upgrades or other home projects. Here are four ways you can use the equity of your home for home-related purchases.
Pay for a home emergency. Unexpected situations like a leaky roof, flooded basement, or kitchen fire can’t be planned for. Even if you have an emergency fund, you might not have enough to cover the entirety of the bills. If you’re in a pinch for funds, use a Home Equity Loan or HELOC to pay for the expenses. These loans typically have a lower interest rate than a credit card or the financing option from the service company.
Buy a rental property. If you want to make extra income, invest in rental property. Use the equity in your home to make the down payment for a property you can rent out through AirBnB or VRBO. Calculate your rental price wisely so you can afford to pay a cleaner after each rental, unless you want to clean it yourself. You should also figure the price to pay back your loan and make a profit off your new property. While this may take time to make a profit, you may eventually produce passive income.
Improve your home. You may have a board of home improvement projects on Pinterest like we do. These dreams can become reality. Use the equity of your home to serve as collateral for your Home Equity loan or HELOC and knock out those projects. Many home improvement projects also increase the value of your home. It’s a win-win situation.
Finance a vacation home. Frequent travelers can use the funds from their HELOC or Home Equity loan to make a down payment for a vacation home. While desirable homes seem to come and go from the market quickly, these loans can get you the cash you need fast. Now, you can spend your long weekends at vacation destinations like Innsbrook Resort, Branson, or another sentimental area.
Keep in mind that the value of property tends to increase over time anyway, as long as the home is kept in ideal condition. By using the equity of your home for home-related expenses, you can expedite the process of growing the value of your house.
Surprising Ways to Use Your Home Equity
Home Equity loans and HELOCs can be ideal for getting money to invest back in your home. However, unlike a Home Improvement loan, you can use the funds for anything. Your purchases don’t have to pertain to your home. Here are some alternative ways you can use the equity of your home for large expenses.
Go back to school. Pursuing further education like college, trade school, or professional development training can get expensive. By leveraging the equity in your home to finance your continued education, you can avoid taking out a student loan at a high interest rate. Plus, by using your home’s equity, you can avoid having multiple loans to manage simplifying your financial obligations.
Grow your investments. If you have a general understanding of how investing works, use the equity of your home to diversify your portfolio. This is only recommended if you already know how to manage investing because there is potential for loss. Whether you choose to invest in stocks, bonds, other mutual funds, or all of these options, it’s important to monitor your progress to make sure you’re making gains, not losses.
Consolidate debt. If you have various types of loans like credit cards, or the previously mentioned student loans, you can consolidate your debt through a Home Equity loan or HELOC. By consolidating your loans, you can save a significant amount of money on interest charges. You can also reduce your risk of forgetting to make a payment since you’ll only have one debt to manage.
Open a small business. If you’ve dreamt of opening a small business, you can use the funds from your home equity to start. Eventually, you’ll need to grow the business to a point where your business’s money is separate from your personal finances. However, most entrepreneurs have to use their own money to begin. If you are confident in your ability to grow the company to financial independence, give this a try, and consider a business loan for larger needs and growth later.
Cover long-term medical care. As we age, medical appointments, prescription medications, and hospital stays often become more frequent—and can lead to unexpected, significant expenses. Using a HELOC (Home Equity Line of Credit) can be a convenient way to access the funds quickly, allowing you to manage these unexpected costs with ease. With fast access to the money, you can feel confident that you’ll have the resources you need to pay your bills on time.
Go on vacation. Have some fun thanks to the work you’ve done to build home equity. Destination weddings, once-in-a-lifetime trips, and retirement vacations can be costly. Using a HELOC is ideal so you can spread out your spending over several months as you plan your trip. Plus, you can avoid using a credit card with high interest rates.
Conclusion
The variety of home loans available allow for your various needs to be met. If you have little equity in your home but need to tackle projects, a Home Improvement loan is an ideal choice. For those who have substantial equity of their home and need to pay for a one-time expense, a Home Equity loan is a wise pick. If you need a line of credit to meet your ongoing needs, a HELOC can fit your needs. As a homeowner, you aren’t required to use the equity of your home to improve the quality of your home. You can use the equity to pay for other non-housing expenses. When you are ready to open one of these home loans, come to Alltru to get the funds you need.
