My husband and I both love a good deal. Whenever we buy anything, we make sure we’re getting the best value for our money. But we don’t limit our bargain hunting to everyday purchases. In fact, we put a lot of effort into keeping down the cost of recurring expenses, like those monthly bills we have to pay.
This is especially important when it comes to getting loans: We don’t want to pay more than necessary to borrow money. So, when we got a home equity line of credit (HELOC) to renovate our home, we wanted to make sure we were getting the best deal.
Click to learn more about what to know before remodeling your home.
Making an effort to get the best terms and rate on a HELOC can pay off because you can save thousands of dollars. Here’s how we got the best deal on a HELOC to pay for a home remodeling project.
We Understood What We Were Getting Into
Before borrowing money, it’s important to understand your options in order to get the best loan for your needs. We opted for a HELOC rather than a home equity loan for two reasons: For starters, the interest rate on a HELOC was lower than the rate for a home equity loan, which meant we would pay less to borrow.
We also opted for a HELOC because we were tackling a big home renovation project in stages and weren’t 100 percent sure what the total cost would be. With a home equity loan, we would’ve gotten a lump sum amount and would have had to pay back the entire amount with interest, even if we didn’t need the full amount to cover our renovations.
A HELOC works more like a credit card. You’re approved for a line of credit up to a certain amount but can withdraw any amount up to your limit. So, if you get a $50,000 line of credit but only use $25,000, you pay back just the amount you withdraw (plus interest).
We Shopped Around
Just like you should shop around to get the best deal on purchases, you should compare loan options from several lenders. If you don’t bother to look for the best home improvement loan, you could end up paying much more than necessary.
We started our search for a home equity loan at the bank that provided our mortgage. But it didn’t offer the best HELOC rates. By shopping around, my husband and I found another bank that gave us access to more of our home equity — 89.9 percent — and a lower interest rate.
Like most HELOCs, the line of credit we got has a variable interest rate. But we have the option to switch to a fixed rate, a good option to have if rates rise. We also avoided a $50 annual fee (which can be common with HELOCs) by opening a checking account with the bank. I had been eyeing that bank’s checking account because of its appealing online money management tools, so it was a win-win.
We Had Good Credit Scores
Having good credit scores helped my husband and me get the best HELOC interest rate the bank offered. In fact, we have excellent credit scores above 800. Even scores in the upper 700s would’ve been high enough to get us the best rates.
Those with lower scores could pay at least one percentage point higher than the lowest rate, according to the credit risk information the bank provided us. That means, for example, that someone with a low credit score would qualify for an interest rate of 5 percent rather than 4 percent. It might not seem like a big difference, but it could add up to thousands of dollars over the life of a loan.
Before applying for a loan, check your credit score at myFICO.com to see whether you need to improve it. (Your credit card issuer might also provide your credit score for free.) It can be worth holding off on applying for a loan to raise your credit score to qualify a lower rate.
More on Your Credit Score: How to Raise Your Credit Score By 100 Points (Almost) Overnight
We Contested a Low-Ball Appraisal
When applying for a HELOC or home equity loan, the amount you can borrow is based on how much equity you have in your home. You won’t have access to 100 percent of your home’s equity because lenders typically limit the amount you can borrow to 85 percent of the equity in your home minus what you owe on your mortgage.
The lender will order an appraisal of your home to determine how much it’s worth and how much equity you have. It’s important for the appraisal to be accurate to show that you have enough equity to qualify for a HELOC or home equity loan. Our appraisal, unfortunately, was not, and our first application was denied.
We knew the appraisal was way off because it showed that the value of our home was $100,000 less than what we had paid for it just six years earlier. We did not buy during a real estate bubble, and home prices actually have been rising where we live. We knew our house hadn’t declined in value.
I pushed back and decided to ask for another appraisal. The second one, which got the square footage of our house correct and used better comparable home sale prices, actually showed that our house was worth $30,000 more than we paid for it. We had even more equity than we thought.
It’s important not to let any oversights — whether they are errors on your credit report that are lowering your credit score, mistakes on your application or an inaccurate appraisal — hurt your ability to get the best deal on a HELOC or home equity loan.
Click through to read more about 6 reasons to tap into your home equity.
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