Home Improvement DIY

One of the great things about being a home owner is that fact that we are sitting in a great investment that should continue to increase in value.  This is especially true if you have doing a lot of home improvements such as installing granite kitchen countertops and decorating your basement.  The property you bought for tens of thousands of dollars some years ago can now be worth hundreds of thousands of dollars.

This is why so many people have decided that they want to enjoy the equity that has built up in their homes.  You can either choose to sell up and move somewhere cheaper in order to release that money or you could take out a home improvement or home equity loan.

People take out these home equity loans for a number of reasons, it may be that you have found yourself in debt because you’ve been splashing out on expensive cars and other toys.  Alternatively you may have a number of home improvement plans such as an attic conversion or landscaping your garden.  Although there are a number of good reasons to take out such a loan, there are also some pitfalls you should be aware of.

What is a Home Equity Loan?

Essentially it’s a loan which is secured on the equity in your house.  If you have owned your own home for many years the value will have increased to way more than your current mortgage.  Or perhaps you put a large deposit down when buying it.  Whatever the reason is that you have a sizeable amount of equity built up, you can easily borrow against it.

HELOC (Home Equity Line of Credit) was initially created to allow home owners to borrow money in order to refurbish and make improvements to their home.  However due to tax reasons amongst other things, HELOC now serves other purposes.

When you pay interest on most other types of loan, the interest paid is not tax deductible.  However tax is deductible on a home loan.  This makes it a more cost effective way of borrowing money.

If you take out a HELOC for up to $10,000 at 12% interest you don’t actually have to borrow the full amount all at one time.  You can simply use what you need as your home improvements go along.  Think of it as being a bit like a credit card or check; you only take out money when you need to buy materials or pay your builder etc.

So the two main benefits basically are that you can borrow just the amount you need when you need it.  This keeps repayments and interest payable down to a minimum.  Then you can also use the interest paid over the year to claim against tax.

If you had a credit card that charged 12% APR, the advantage is clear. You pay a net lower amount of money to the lender as a result of using a HELOC as opposed to a credit card to pay for your purchases.

Despite all these advantages you need to remember that this is not free money; it’s still a loan which needs to be repaid.  You need to view it in the same way you would view a car loan or credit card spending.  If you are an impulsive sort of person who gets a thrill out of spending money, a HELOC will only give you another means to keep your addiction going.  If you have current debt problems please don’t view a HELOC as being the answer to your prayers because it could make your financial situation worse in the long run.

But if your reasons for taking out a home improvement loan has nothing to do with sorting out existing debt problems and you simply want to improve your home, it’s a great way to go about doing so.  It’s one of the most flexible and cheapest ways to borrow money.  And if you carry out the improvements to you home you should be able to increase the value of it.  Spending money on your home will give you financial benefits later on when you go to sell.  Many people like flipping houses.  If you spent the same amount of money on an expensive sports car you wouldn’t get anywhere near what you paid for it.  Your home should also be seen as an investment and sometimes you need to spend money to make money.

 

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