Why should I use a home equity loan for my home renovation project?

Question: Why should I use a home equity loan for my home renovation project?

Answer:

Home equity loans traditionally have been used for home improvement projects because there is a friendly relationship between your home's equity and improvements made to your home. You've heard of a vicious cycle? Well, this is a friendly cycle.

In other words, let's say you have $50,000 in equity in your house. Using a home equity loan, you use this $50,000 to put on an addition, add new siding, and remodel the kitchen. These projects in turn increase the value of your house and add yet more equity to your home.

Caution: this process does not continue indefinitely. Your home's equity is also dependent on other factors unrelated to your renovations. But the relationship between equity and your home's condition is certainly one that you should leverage.

Also with home equity loans you can typically pull out more money, and at lower interest rates, than with other types of financing options. Be careful, though, because home equity loans tend to be tied to variable interest rates. And because they are variable, they can always "vary" in the upward direction. Fixed rate home equity loans are available, but you will have to ask your loan consultant about them. The fixed rate is higher than the variable rate and is not usually advertised. If rates appear to be steadily rising, it may be a good idea to consider the fixed rate.