HELOC vs. Credit Cards for Home Renovations
A new study from TD Bank shows that many homeowners are tapping into their home equity to fund home renovations. While 48% of homeowners said they will partially use savings to pay for renovations, 25% say they will use a home equity line of credit (HELOC). Another 24% said they plan to use a personal credit card.
This brings up an important question. What’s the best way to finance home renovations? Should you take out a HELOC or pay with a credit card?
Pros and Cons of HELOCs
A home equity line of credit is a loan on the equity of the home (the value minus outstanding loans). It is similar to a second mortgage in many ways, but functions more like a credit card. The lender approves of a line of credit based on the home’s equity and the borrower’s credit. Then, the borrower is able to borrow up to that amount for a pre-determined length of time.
Example: A HELOC of $15,000 for 10 years would allow the borrower to take out up to $15,000 from the bank for up to 10 years. If the borrower only uses $5,000, there would still be $10,000 in available credit. If the borrower paid $5,000 back within 2 years, there would be $15,000 available for the remaining 8 years.
HELOCs tend to have a lower interest rate than a credit card. These rates are typically variable. HELOCs also come with the risk of foreclosure if the payments go into default. The house is used as collateral for the line of credit. Many homeowners use a HELOC as an emergency fund or revolving renovation fund.
Pros and Cons of Credit Cards for Home Renovations
There are some credit cards specifically designed for home improvements, but most homeowners use a standard rewards credit card instead. This may allow them to earn cash back or travel miles while making large purchases on their cards. Some credit cards have bonus rewards available for home-related expenses. Store credit cards have the highest opportunity for discounts, but they have less flexibility because they are reserved for one store.
Credit cards usually have higher interest rates than HELOCs, and tend to have lower credit limits. For instance, a person with good credit may get approved for a $10,000 credit card. That same person could be approved for a $25,000 HELOC.
Choosing the Best Financing for Your Home Renovations
When choosing between a HELOC and a credit card for home renovations, consider the following:
- How much money do you need?
- How long will it take you to repay it?
- What can you qualify for based on your credit and your home’s equity?
- Can you earn significant credit card rewards by financing your home renovations?
If you have a hefty renovation or need a long repayment period, a HELOC may be a better option. This may give you a lower interest rate and a longer time to pay for the expenses. If you can quickly pay off the charges, a credit card may give you rewards that a HELOC would not offer. Using your credit card could also qualify you for a higher credit limit in the future.
Compare all your options to determine which path is ideal for your home renovations.