As a Directions Credit Union member, you have several choices when it comes to financing a home renovation. And we want to help you find the right one for your specific needs!

First, let’s take a look at some common choices and why they’re not the best idea:

1. Home Equity Loan

A home equity loan is a loan that’s secured by your home’s value. Home equity loans allow you to borrow a fixed amount of cash, which you receive in one lump sum. Most home equity loans have a fixed interest rate, a fixed term, and a fixed monthly payment.

Cons:

• Taking out a home equity loan can mean paying several fees.
• Receiving all the funds in one shot can push you into spending more than you actually should.
• You may find that the amount you borrowed is not enough to cover the renovation.

2. Credit cards

If you’re doing minor touch-ups on your home and you can afford to repay the charge within the next year or two, a credit card could work. For a more significant renovation, though, funding them through your credit cards can have negative effects on your financial health.

Cons:

• You may be stuck paying interest of 15% or more until you pay off the balance on your card.
• Your credit score is negatively affected by the large, unpaid balance on your card.
• You might send yourself into a cycle of debt once you already owe so much money on your card.

3. Personal loans

Personal loans are short-term loans.  They may or may not be secured by some form of collateral (like a car or other titled good). Personal loans typically need to be repaid within 24-60 months.

Cons:

• Upfront costs and interest rates on personal loans can be relatively high.
• Like a home equity loan, you’ll receive all the money you borrow in one lump sum. This can compel you to spend it all, even if you don’t need to do so.

4. Retail credit cards

Retail stores lure customers into opening a credit card with the promise of automatic savings. Home-improvement shops may encourage you to finance an extensive renovation project on their card. However, this is usually not a good idea.

Cons:

• Retail credit cards tend to have exorbitant interest rates of up to 30%.
• With so much credit available, there’s a strong urge to splurge and go all out with your renovations.

Enter the home equity line of credit (HELOC)

When looking for a way to pay for home improvement projects, we recommend a HELOC. And for a good reason.

A HELOC is an open credit line that is secured by your home’s value. HELOCs have adjustable interest rates and a “draw” period in which you can access the funds. When the draw period ends, the loan will have to be repaid, either immediately or within the next 15-20 years.

Here are just a few benefits of choosing a HELOC over another loan type:

You’ll save money

• HELOCs help you stick to your budget. Instead of walking out with a considerable amount of cash when you open the loan, you’ll have access to a line to use as needed. This credit will only be available to you for a specified amount of time, and it will have a fixed amount as your maximum draw. You’ll withdraw money in the amount, and at the time you need.
• Plus, you’ll only pay interest on this amount (not the whole line). This aspect of HELOCs makes them especially convenient.
• Upfront costs for HELOCs also tend to be lower than those of other loans.

Flexible terms

Most HELOCs have varying interest rates. Repayment of HELOCs is also flexible. When the draw period ends, you may be entitled to renew your credit line.

Monthly payments also vary

• Many lenders only require borrowers to make payments toward the interest of their loan during the draw period. Once that time is over, the borrower will need to pay back the entire principal of the loan immediately, or over 10-15 years.
• You’re only paying interest on the money you withdraw. You’ll have the freedom to take out a larger line of credit and decide how much of it to use later on.

You’re improving your home’s value

It makes perfect sense to borrow against your home’s equity for adding to its value. If you plan on selling your home within the next ten years, a HELOC can pay for itself, and then some.