3 Reasons Why Using a Home Equity Loan to Finance Renovations Makes Sense Financially

Home equity loans are commonly used to fund extensive home renovations, and there are very good reasons for it. These loans are based on the equity that you have in your home, which is the difference between what you owe on it and its estimated market value. They act like a second mortgage, where the bank uses your home as collateral for the loan. It's usually quite easy to get approved for a home equity loan, and you'll receive money immediately that you can use to pay contractors who are performing renovations for you. Below, you'll learn three reasons why taking out a home equity loan to pay for home renovations is often a good financial decision.

1. Home Equity Loans Offer Low Interest Rates

You could take out a personal loan or use a credit card with a very high credit limit to pay for extensive renovations on your home, but a home equity loan will give you the money that you need at a much lower interest rate. Interest rates for equity loans are very low due to the fact that they don't present very much risk to the bank. You're limited in the amount of money you can take out for your loan based on the amount of equity you have in your home, and the bank can force you to sell your home in order to recoup the loan if you default on it.

Whether you pay the loan back or default on it, the bank will typically get their money back — the only real risk to them is a housing market crash that significantly reduces the value of your home. When compared to unsecured credit like personal loans or credit cards, the interest rates of a home equity loan are much lower because of this reduced risk to the bank. As a result, using your home's equity to secure the loan makes the most financial sense — with lower interest rates, the total amount of money you'll pay back for the loan will be less than if you used another form of credit to pay for renovations.

2. Performing Multiple Renovations at Once With a Large Loan Will Lower Overall Renovation Costs

In addition to low interest rates, home equity loans also make it easy to secure a loan for a large amount of money. This allows you to perform multiple renovations at once, which helps to keep the total cost of renovations down. Updating your home's electrical wiring or plumbing, for example, will require a contractor to remove large sections of drywall in order to access the wires or the pipes. If you do them sequentially, you'll need to remove the drywall, replace it and then remove it again once the next remodel is needed.

Doing everything at the same time makes it much easier for contractors to perform their work, and it also means that you'll be able to update your home more quickly. With the large loan amounts offered from home equity loans, you're better able to schedule multiple extensive renovations at once, and combining renovations can lower the total cost since it's easier for contractors to perform their work.

3. Using Your Loan for Renovations Boosts Your Home's Value

Finally, using a home equity loan for renovations helps to boost the value of your home, which is often the largest asset that someone owns. Some people use these loans to go on vacation, pay medical debt, or purchase cars with cash. Unfortunately, none of these will help grow your assets — putting the money from the home equity loan back into your home by upgrading and renovating makes more financial sense. In addition to making your home more personalized to your tastes and better for you to live in, an extensive renovation project backed by a home equity loan is a way to maximize the amount of money you'll receive if you decide to sell your home.

Overall, using a home equity loan for renovations helps boost your home's value while costing you very little in terms of interest due to the low rates that they offer. These loans also typically feature low monthly payments, making repayment easy to fit into your budget. If you're thinking about renovating your home and wondering where you'll be able to find the money for it, consider taking out a home equity loan in order to finance it — overall, this type of loan usually makes the most financial sense when funding home renovations.

Talk to a lender, such as MidwestOne Bank, to get started.