Bethpage Federal Credit Union: 4 Reasons to Avoid Personal Loans and Credit for Home Updates

NEW YORK, June 21, 2022 (GLOBE NEWSWIRE) -- It can be expensive when it comes to homeownership, particularly when looking at updates and renovations. It is often enticing to put the cost of those home updates on a credit card or even take out a personal loan to have a lump sum to put towards those repairs and renovations. 

While credit and personal loans may seem appealing, it's helpful to consider more competitive options available for home updates. 

1. High Interest Rates

While using credit cards and personal loans is an enticing way to pay for costly ventures over time, one of the biggest things to be cautious about is the interest rate of that credit card or personal loan. When looking at the interest rates for credit cards, the average is between 18% and 23%, and rates for personal loans can vary between 5% and 25%, depending on how much is withdrawn.

Meanwhile, the average interest rate of a home equity line of credit (HELOC) typically range as low as 2% to 7%. Using a HELOC to pay for the updates on the home saves a significant amount of money on interest compared to other forms of credit or loan.

2. Shorter Pay Back Period

When anyone gets a credit card or takes out a personal loan, the repayment begins within 30 to 60 days of opening that account and requires consistent monthly payments on the amount that is spent. If using a HELOC or home equity loan, the repayment begins later and can be paid over a longer period.

Many HELOCs feature two separate periods - a withdrawal period and a repayment period. For many HELOC lenders, the withdrawal period can last up to 10 years, where borrowers can withdraw as they need from their available line of credit. Many lenders will also allow borrowers to only pay interest during the withdrawal period against what they borrow, which keeps monthly payments low. This unique ability of a HELOC makes it especially attractive to prospective home sellers, as they can enjoy low payments until they sell their home to repay the HELOC in full.

3. Borrowing Power 

When comparing the amount someone can borrow with a personal loan or the credit limits offered by a credit card, borrowing power is often significantly lower than the amount one can borrow through home equity financing, like a HELOC or a home equity loan. 

Because a HELOC or a home equity loan uses a home as collateral, lenders can provide secured loans with borrowing limits dictated by the available home equity. As home equity is the difference between the resale value of a home and what is owed on the mortgage, HELOC borrowing limits can often match the expensive bills of home renovations.

4. Tax Deductions 

Using home equity financing for home renovations or updates has a unique benefit that personal loans or credit cards don't have. Tax deductions.

With a home equity loan or HELOC, using funds that are specifically for updates on the home may qualify any interest that is paid on the loan for tax deductions. 

Completing updates and renovations on a home can be important not only for the functionality and style of that home but also can help increase the home's value. While credit cards or personal loans may seem like simpler or quicker ways to pay for home updates, using home equity financing like a HELOC will help borrowers earn lower interest rates, higher borrowing limits, and potential tax deductions, where many HELOC applications can be completed in minutes and payout can begin within weeks. Consult a tax professional regarding the potential deductibility of interest.


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