When considering a home remodeling project, you have many decisions to make well before you hire a contractor or choose paint colors. You’ll need to plan the scope and budget of the remodel, and then you must determine the best way to pay for it.
If you decide to finance your project, you should investigate the variety of loan options that are available and choose the one that fits your personal financial situation. Two good loan types to consider for home remodeling are home equity lines of credit (HELOC) and personal loans. Let’s look at the similarities and differences of a personal loan vs. a home equity line of credit.
How do HELOCs and personal loans work?
A Home Equity Line of Credit (HELOC) is a form of revolving credit which allows you to borrow against the equity in your home. To put it another way, your home’s equity is what’s left when you subtract your mortgage balance from your home’s value. The interest rate on a HELOC is typically variable, tied to the prime rate, and can change over time.
A personal loan, on the other hand, is an unsecured loan that is not tied to any collateral. Personal loans have a fixed interest rate, regular payments and a set repayment period, usually one to five years.
Personal loans vs. HELOCs: Similarities
Both HELOCs and personal loans require a credit check for approval, meaning that your credit score will be a factor. The baseline credit qualification requirements are typically the same, and both loans will ultimately require you to pay principal (balance) plus interest on the money that you borrow.
Personal loans vs. HELOCs: Differences
One of the biggest differences between home equity lines of credit and personal loans is the way the funds are distributed. With a HELOC, you can withdraw funds up to your credit limit whenever you need them during your draw period and pay interest only on the amount you've drawn or used and borrow again without having to reapply.
Personal loans give you your funds up front in one lump sum. You’ll then make fixed monthly payments until the loan is paid off.
Another difference is that personal loans usually have a higher interest rate because they’re unsecured and involve greater risk for the lender. Since HELOCs are secured by the equity in your home, their rates – while still variable – may be a little lower.
Which loan is best for remodeling expenses?
When it’s time to choose a financing option, your decision will be based on your own personal needs and the scope of your project.
If you’re not exactly sure about the overall costs of a large, ongoing remodeling project and need the flexibility of drawing funds as you go, a HELOC may be the better choice.
In addition, a HELOC can have terms up to 25 years. HELOCs allow you to spread the expense over a longer period of time. You will only pay interest on the portion of the line that you use, but because the interest rate on a HELOC is variable, your monthly payments may increase if interest rates rise or if you make additional draws.
A personal loan may make more sense if you have a one-time expenditure with a definite cost, such as replacing aging windows with energy efficient ones or building a new deck. Personal loans give you the stability of a fixed interest rate and a set repayment period, which is helpful when planning your budget. Personal loans also tend to have a faster application and approval process compared to a HELOC, which can be a little more complex.
Whatever option you choose, it’s a good idea to get a free credit report from AnnualCreditReport.com to learn your credit score and check for any errors or discrepancies that may need to be corrected prior to submitting a loan application.
| Home Equity Line of Credit | Personal Loan | |
|
Interest Rate |
Typically lower than a personal loan |
Higher than a home equity line of credit |
|
Loan Amount |
Up to 90% of the value of your home1 |
Depending on several factors as income, debt-to-income ration and credit score |
|
Repayment Terms |
Features a 25-year term: revolving line (draw period) for 10 years and then a 15-year repayment term2 |
Generally shorter repayment terms. Consult with a banker for more details. |
|
Tax Benefits |
Your interest may be tax deductible. Please always consult a tax advisor whether interest is deductible and for tax questions that pertain to your personal circumstances. |
Interest paid is not tax deductible |
|
Collateral |
Home used as collateral |
No collateral needed |
We’re here to help
Ultimately, the best choice for financing home remodeling will depend on your specific needs and financial situation. Before you choose between a HELOC and a personal loan, it's important to carefully consider the terms of each, including interest rates, repayment terms, and fees.
Interested in a HELOC? Learn more and apply here.
If you're still deciding which option is best, visit a nearby financial center or call 1-877-844-4948, option 1 to speak with one of our friendly and knowledgeable bankers. We’ll work with you to assess your personal financial situation and help you determine if a personal loan or HELOC is best for your remodeling project.
1Hancock Whitney Bank home equity lines of credit or home equity loans require a mortgage on an owner-occupied 1-4 family dwelling with minimum lendable equity of $10,000 and a maximum loan-to-value of 80% in Texas†, or a maximum loan-to-value of 90% in Mississippi, Alabama, Florida and Louisiana. Property insurance required. Rescission rights may temporarily restrict availability of funds. See a banker for details.
Important Information for Texas Residents: Texas laws impose certain restrictions on lines secured by a lien on your home. In Texas, each individual advance from your line of credit must be in an amount of at least $4,000. The maximum amount of your new home equity line, when combined with the dollar amount of all other liens on your home, may not exceed 80% of the fair market value of your home on the date your home equity line is made. Only one home equity line is allowed on the home at a time and no more than one home equity line may be made on the home within a 12-calendar month period. Other restrictions apply. See a banker for details.
Overdraft option and check access not available in Texas.
2The Bank pays closing costs on home equity lines of credit up to and including $250,000. However, the Bank will not pay any fees associated with surveys or any curative title work that may be required in order to perfect a lien, nor will the Bank pay any initial or ongoing homeowner’s or condominium association fees or costs. All such fees and costs are the client’s responsibility. The Bank also will not pay any portion of the Alabama Mortgage Recording Tax, the Florida Intangible Personal Property Tax, the Florida Documentary Stamp Tax, the Orleans Parish Documentary Tax (where those taxes may be applicable and vary with the loan amount) for a Line with a credit limit greater than $100,000. Clients have the option to pay closing costs on lines under and including $250,000 and receive a 0.50% rate discount on the regular non-promotional rate. On lines of credit over $250,000 the Bank might pay on your behalf a portion of your closing costs up to a maximum of $500. Fees associated with opening a Home Equity Line of Credit generally range from $0-$7,372.
If you voluntarily cancel your line of credit within 12 months of opening, you will reimburse to us the non-affiliated third-party closing costs we paid, up to 2% of your credit limit. In MS and LA only, you will reimburse the lesser of (i) 2% of your credit limit or (ii) 5% of the unpaid principal balance of your line at the time you cancel. No obligation to repay closing costs will apply in Texas. Additionally, no obligation to repay closing costs will apply if the source of the prepayment funds is a refinancing by us or an affiliate of ours or if the prepayment occurs more than one year from the date the loan is made.
The information, views, opinions, and positions expressed by the author(s), presenter(s), and/or presented in the article are those of the author or individual who made the statement and do not necessarily reflect the policies, views, opinions, and positions of Hancock Whitney Bank. Hancock Whitney makes no representations as to the accuracy, completeness, timeliness, suitability, or validity of any information presented.
This information is general in nature and is provided for educational purposes only. Information provided and statements made should not be relied on or interpreted as accounting, financial planning, investment, legal, or tax advice. Hancock Whitney Bank encourages you to consult a professional for advice applicable to your specific situation.
Sources:
Bankrate.com, Personal Loan vs. Personal Line of Credit: What’s the Difference? https://www.bankrate.com/loans/personal-loans/personal-loan-line-of-credit/
Bankrate.com, What Is a Home Equity Line of Credit, or HELOC? https://www.bankrate.com/home-equity/heloc-rates/?zipCode=70119#what-is-a-heloc
Equal Housing Lender. All loans and accounts subject to credit approval. Terms and conditions apply.
Post comments on this article
Enter your first name, email and comments below