Tips for Financing That Home Remodeling
Summer is coming, and homeowners may be contemplating remodeling. The recovery in housing prices means more people have equity that they can tap for projects. As interest rates tick upward, though, homeowners may want to consider whether to draw on that equity.
“I do think the rate landscape is a factor at this point in time,” said Greg McBride of Bankrate.com. How will you pay for a project? If you have cash, consider using it, because interest rates paid on savings are quite low, said Robert Schmansky of Clear Financial Advisors, outside Detroit. If you must finance the work, a home-equity loan or line of credit “isn’t the end of the world,” he said.
As interest rates rise, refinancing a mortgage is becoming less attractive. The average rate on a 30-year, fixed-rate mortgage was 4.03 percent at the end of April, according to Freddie Mac. Home-equity lines of credit function like a credit card rather than a traditional term loan. Lines of credit, or Helocs, are more complex to manage than a traditional second mortgage and come with variable interest rates, typically tied to the prime rate. That means monthly payments could rise. Lines of credit typically have a 10-year “draw” period, during which borrowers use the available funds as necessary and make interest-only payments. After the draw period, the lines usually convert to regular installment loans, with monthly payments over another 10 to 20 years.
The average rate on a home-equity line of credit is 5.45 percent, Mr. McBride said, although some lenders offer “teaser” rates as low as 2.99 percent for an introductory period, typically six months. Home-equity loans, usually made at a fixed-interest rate, may be more palatable than lines of credit as rates rise. But many larger banks stopped making them, preferring to offer lines of credit, which reduce the lender’s risk from rising rates. Ultimately, the consumer’s risk tolerance is a factor. “If they don’t like the possibility that the rate can change,” said Mike Kinane of TD Bank, “then the loan product is probably a safer bet.”
EQUITY OPTION The recovery in housing prices means that more people have equity in their homes that they can tap for projects like updating a kitchen.