When it comes to home remodeling, it’s best to choose wisely when considering about financing options especially with interest rates are on the rise. The recovery in housing prices leads to more people having equity in their homes that they can just splurge on remodeling projects such as adding a bathroom or updating a kitchen. However, as interest rates getting higher and higher, homeowners should reconsider whether to draw on that equity for a particular remodel.
Mike Kinane, general manager for home equity products of TD bank once said “consumers will be borrowing against their homes” when doing such remodeling subjects. This is good news for people who had cash to begin with since interest rates paid on savings are still low up to this point. Robert Schmansky, founder of Clear Financial Advisors said “If you must finance the work, then a home-equity loan or line of credit isn’t the end of the world”.
As interest rates soaring higher than ever, it’s never a good option to refinance an existing mortgage to splurge out cash just for remodeling purposes. There’s an alternative for this though. Home-equity lines of credit is a service that functions like a traditional credit card rather than a traditional term loan. This is a better way of financing your home remodeling. These lines of credit services come with different interest rates that’s usually tied to the prime rate. Which means monthly payments will increase if the interest rate also increases.
However, lines of credit have a 10-year draw period, where homeowners can use the available funds to make necessary payments. After this draw period, the lines will convert into regular installment loans that comes with monthly payments for both interest and principal which is required for another 10 to 20 years.
Some homeowners however, used these lines to spend on different sorts of things such as buying a new car or going on a vacation. But since then, they have been careful when spending such. Things such as specific home upgrades or college savings have been the priority of these homeowners.
Another option is the “Home-equity loans”, which is a traditional second mortgage that has a fixed interest rate that’s palatable than lines of credit as rates rise. However, larger banks have stopped using this option and suggest borrowers to use lines of credit instead. At the end of the day, the choice will depend on the consumer if they will choose that one over the other.
One last thing, one way to manage the risk of rising interest rates is approaching a lender so that they can give you an option to convert cash that’s already drawn from a line of credit into a fixed-rate loan to lock in a rate.