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Home Improvement Mortgages are Modeled as a Home Equity Loan Staff - Mortgage Lenders Plus.com

During the rush to refinance and extract equity from homes over the last five years, there has been an ongoing warning that home equity loans or home equity lines of credit (HELOCs) are not found money. The primary reason people take out second mortgages is to consolidate debt. That’s a grand idea, but it requires a change in spending habits as well. It is always recommended that refi funds be used to increase your net worth in some fashion. That’s why the second most popular reason for a home equity loan is for home upgrades or remodels – which makes that loan a home improvement mortgage.

A home improvement mortgage is usually modeled as a home equity loan. It is based on the amount of equity you hold in the home, established by a new appraisal. Home improvement mortgages of this type are usually fixed rate loans of five, ten or fifteen years’ duration. The home improvements that you complete through the use of this fund will add value – and presumably aesthetic improvement – to your home. At the same time, the home improvement mortgage has all of the tax advantages of a standard mortgage: the interest on the loan is tax deductible.

A HELOC can also be used for home improvements and establishing a line of credit is considerably cheaper than taking out a home improvement mortgage. However it’s going to have an adjustable interest rate that can be more costly than the fixed rate that is available with a second mortgage. The interest on a HELOC is deductible up to a debt of $100,000. If your home improvement project is a major one, the expense of a home improvement mortgage is probably worthwhile.

A home improvement mortgage is going to have a fixed interest rate that is two to two and a half percent higher than the available fixed rate on a thirty year mortgage. These rates are for prime borrowers; if your credit rating is less than stellar expect to pay a little more. Home equity loans aren’t cheap; the loan origination costs, appraisal and other fees are going to mirror the charges on your original mortgage, although the collection of fees going to the lender will be greatly reduced because the loan will probably be a fraction of the original mortgage.

Evaluating the wisdom of a home improvement mortgage should include an estimate of your ability to recover the costs. That means an estimate of the home’s increase in valuation, combined with any increase you might expect as a result of remaining in the home for an extended period after the improvements are completed.