Buying Guide to Home Improvement and Home Equity Loans

Recently my husband and I decided to put a pool in our backyard. We were faced with the task of trying to decide what type of loan to pay for our pool. I knew that if I applied for credit too many times it would eventually negatively affect my credit score. I found out later that now consumers have a 14 day window to apply for loans before it adversely affects their credit score.

At first I decided to go with large well known companies. In the past I had a bad experience when I used an unknown company who initially promised me a good rate and then when it came right down to the final loan I wasn’t getting the rate I was promised. I had already paid for an appraisal for my home and then had to go with another company. The appraiser charged me a hefty document fee in order to change the documents to another bank stating that she was hired by the first bank.

The first options I researched were home equity loans and home equity lines of credit. The difference between these two options is that a home equity loan is a fixed amount with a fixed interest rate for the life of the loan. A home equity line of credit you can draw from several times and the interest rate varies with going rates.

I wanted a lump sum all at once and I knew that interest rates are currently climbing so I choose a home equity loan. Home equity loans have two popular options. 15 year terms with a fixed interest rate for the entire term or 30 year payments with a balloon payment due in 15 years. The 30 year payments mean that the payments are calculated as if you have 30 years to pay it off but you owe a lump some or balloon payment after 15 years. For example let’s say I was borrowing $50,000 at a rate of 8.375% the payment on a 30 year due in 15 years is $380 per month and in 15 years I’d owe $37,000. This same loan amount with the same 8.375% rate on a 15 year loan has a payment of $489 per month and in 15 years it’s completely paid off.

I was told that the reason the 30 year due in 15 years option is sometimes a good one is because you can save nearly $91 per month. Also if you plan not to keep the loan for very long because you plan to sell the home before 15 years you can save on your monthly payments. Since I was using this loan for a swimming pool I did not want to owe $37,000 after 15 years because after 15 years is usually when pools need resurfacing and equipment replacement.

The quotes I was receiving seemed kind of high to me even though my husband and I have high credit scores. One of the pool builders gave us a flyer that offered a home improvement loan for swimming pool construction which acts as a second mortgage loan. The interest rates are fixed for the life of the loan and no equity is required. I filled out an online application and then called to check on the loan a few days later. I was surprised to be offered at 6.75% loan for a 25 year term. On $50,000 the payment would be $350 fixed for the entire loan period. This was a percentage point and a half over what other companies had quoted me for a home equity loan. This was more in the ballpark of what my husband and I were willing to pay each month. I was also pleased find out that just like other home loans the interest paid on the loan is tax deductible.

Anytime you make a huge purchase it is so important to do your homework. The market is constantly changing, what was true 3 months ago may not be true today.

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