Q: I’ve taken out a home equity line of credit for badly needed home improvements.
The improvements will cost less than $10,000. What are the benefits of a home equity line of credit versus a regular home improvement loan (other than the lower interest that prompted me to do this)?
Would using a low-interest check offered by my credit card company be a better choice? I’ve got one that says the interest rate would be 3.9 percent until the debt is paid off.
A: When you’re tackling a small home improvement job, the most important question you need to answer is how quickly will you be able to pay off this loan?
The answer will determine whether you use a home equity loan (HEL), a home equity line of credit (HELOC), a credit card or check or a home improvement store financing option.
If you can pay off the loan in a few months, you may be able to take advantage of a no-interest-due home improvement store financing option. Stores like Lowe’s and The Home Depot regularly offer customers a 0 percent financing option on loan amounts from $10,000 to $30,000. The catch is that you typically only have a few months to pay off the balance.
If you’ll need more time to repay the debt, look around to see what kind of low interest rate financing is available to you.
You might find that charging everything to a low-interest credit card or writing a check from that account that has a fixed low interest rate for the life of the loan is a better bet.
Just make sure that the interest rate can’t change while you owe the amount and that the credit card company can’t shorten the time period for you to repay the amount owed. You don’t want to take out the loan and then find out that the lender can increase the interest rate or require you to pay back the amount owed before you are ready to pay it back.
If you itemize on your federal income tax statement, it might be less expensive to get a home equity loan or a line of credit from your local bank or credit union. You would be able to deduct the interest on the loan on your federal income taxes.
Fixing up your house is expensive enough. Making a smart choice about financing your home improvement project can save you big bucks down the road.