Homeownership is wonderful, but there is a long list of expenses to consider, including dealing with the costs of home improvements. It is always nice to improve your home to make it more enjoyable to live in, but paying for home improvements always should be handled with care.

When it comes to paying for home improvements, there are usually two schools of thought. The first is to use an unsecured loan, such as a credit card, and the other is to use a secured home equity loan, such as a home equity line of credit or HELOC. Specifically, you may be thinking about Home Depot loans vs HELOC. Let’s learn more about each in the article below. If you have questions about a Home Depot credit card vs HELOC, our lending experts at Home Equity Mart can help.

Why Use A Home Depot Credit Line For Home Renovations?

A credit card is an unsecured loan, meaning that there is no collateral backing the loan.

So, you don’t lose collateral if you don’t pay the loan, but it will damage your credit and you can be sued by the lender to collect.

A Home Depot credit card also comes with a higher rate because it is an unsecured loan. The Home Depot project loan is popular choice if the homeowner doesn’t want to leverage their property with a home equity loan.

You may be able to find a Home Depot interest rates program that keeps interest under control for the first 12 or 18 months you have the loan.

If you pay off the Home Depot project loan before the low or no-interest period ends, you may pay a lot less interest. This type of Home Depot credit line may only be available if you have good credit.

You also may find a Home Depot credit card that offers cash back, points, miles and other rewards. Check with Home Depot online and see if your credit score qualifies you for a low-interest credit card with points and rewards. The various benefits could make a Home Depot card worth it for your home renovations.

Just remember that you need to typically pay off what you have run up on the card for home renovations within a certain period. Otherwise, all the interest will be due. Standard interest rates on credit cards and Home Depot project loan in 2024 can be as high as 30%.

Also, keep in mind that it is easy to overspend on a credit card on home improvements. The cost of construction materials has risen in the last three years, like most things. You also may end up paying more interest if you do not pay off the card in time.

Another possible benefit of a Home Depot credit line or credit card is you may qualify for a discount or rebate on Home Depot purchases you make with the card. This benefit could save you 3% or 5% on your total Home Depot purchases. So, if you spend $10,000 in Home Depot credit, you could qualify for a rebate of maybe $300 or $500, depending on the deal you qualify for.

A credit card has drawbacks, especially the potentially higher rate, but at least you do not have to risk your home or other collateral if you do not pay. You may want to choose a Home Depot project loan if you have good credit and spending discipline.

Taking out a large Home Depot line of credit could affect your credit because the credit bureaus consider credit utilization an important factor in your credit score. If your credit card balance is more than 30% of the credit line, your score will drop. Credit utilization does not apply to HELOCs or home equity loans.

Why Get A HELOC For Home Renovations?

Another option for paying for home renovations is a home equity line of credit or HELOC, The home equity line of credit is a 2nd mortgage with a variable interest rate and an interest-only payment during the draw period, which is usually 10 years.

A HELOC has a lower rate than most credit cards and a longer payment period, so the payment each month may be lower than a credit card. Also, you can usually get a higher credit line because the line is based on the equity in your home. So, you may qualify for up to 80% or 85% of your equity, combined with your first mortgage. This home improvement loan is backed by your home, so the rate is lower. But remember, your home is collateral, so you need to pay or you could lose the home.

A HELOC has a variable rate that could go up or down in the future. If the rate goes up, your payment will go up, so only get a HELOC if you are sure you can handle the higher potential payment. There also is more financial uncertainty because the rate can go up. So, you should consider other options if you prefer financial certainty. Another choice is a home equity loan, which is a second mortgage with a fixed rate.

The HELOC can be reused, like a credit card, when you repay the credit line. But you need to have at least 20% equity in your home to qualify, so if you don’t have a lot of equity, you may need to get a credit card or personal loan.

For example, if your home is worth $400,000 and you have $200,000 left on the mortgage, you have $200,000 in equity. You may qualify to borrow up to $160,000 or so, depending on the lender. You shouldn’t borrow more than you need because of the interest, but you can borrow a lot with a HELOC if you have a lot of equity. This program could be a good deal if you have large home renovations planned, such as a family room extension or pool.

A HELOC can be maxed out without negatively affecting your credit score. Many small business owners choose the self employed HELOC option.

In 2024, interest rates haven’t decreased as fast as expected because inflation is still persistent in the US economy. If you get a HELOC, your rate may be in the 9% or 10% range, which is still better than most credit cards. Most personal loan rates are quite a bit higher than home equity loan rates this year. If interest rates drop in the next one or two years, your interest rate may decline, but it also could rise. You should always have a financial cushion built in when it comes to borrowing money backed by your home. Hope for lower rates but be prepared to pay a higher payment if high rates persist or rise. Apply for a HELOC today.

What is the Difference Between a Home Equity Line of Credit and Home Depot Loans?

When it comes to financing home improvements, homeowners have multiple loan options, including Home Depot loans and home equity lines of credit (HELOCs). Although both can be used to fund home renovations, these financing solutions differ in terms of loan structure, interest rates, eligibility criteria, and repayment terms. Understanding the distinctions between the home equity line of credit and Home Depot loan options is crucial to selecting the one that best fits your needs.

1. Definition and Structure

A HELOC is a revolving line of credit that allows homeowners to borrow against the equity they have built up in their property. It works similarly to a credit card, offering flexibility by allowing borrowers to draw funds as needed during the draw period, typically 10-15 years. Homeowners only pay interest on the amount borrowed and can repay and reuse the credit limit as needed.

On the other hand, Home Depot Loans refer to financing options provided through Home Depot’s partnerships with lending institutions. These loans include both store credit cards and project loan programs designed to cover home improvement expenses. Unlike a HELOC, Home Depot loans are unsecured, meaning they don’t require home equity as collateral.

2. Interest Rates

HELOCs generally offer variable interest rates that fluctuate with market conditions. Rates are often tied to the prime rate, making them a favorable option when market rates are low. However, as rates rise, borrowers may face higher payments during the loan term.

In contrast, Home Depot loans may feature fixed interest rates that remain the same throughout the loan period. This predictability can be helpful for budgeting, especially for individuals who prefer stable payments. However, Home Depot loan rates are usually higher than HELOC rates because they are unsecured.

3. Eligibility and Application Process

HELOC eligibility depends on several factors, including the borrower’s credit score, home equity, income, and debt-to-income (DTI) ratio. Lenders generally require a minimum of 15-20% equity in the home to qualify for a HELOC. The approval process may also involve a home appraisal to determine the property’s value.

Conversely, Home Depot loans are more accessible, often available to borrowers with lower credit scores. Since these loans are unsecured, they don’t require homeowners to tap into their property equity. Home Depot project loans, for example, are relatively easy to apply for, with a straightforward online or in-store process that focuses primarily on the borrower’s creditworthiness.

4. Loan Amount and Usage

A HELOC offers flexibility with large loan limits based on the borrower’s home equity. The funds can be used for various purposes, from home improvements to debt consolidation, or even as a down payment on another property. This makes HELOCs highly versatile.

In contrast, Home Depot loans are specifically geared toward home improvement projects. The loan amount is limited to covering expenses related to remodeling, repairs, or renovations purchased through Home Depot. Therefore, the scope of spending is narrower compared to a HELOC.

5. Repayment Terms and Flexibility

HELOCs typically have two phases: the draw period and the repayment period. During the draw period, homeowners can access funds and make interest-only payments. Once the repayment period begins, borrowers must pay both principal and interest. The loan term can range from 10 to 30 years, depending on the lender’s terms.

Home Depot loans, however, are structured as installment loans with fixed monthly payments over a predetermined period. The repayment terms usually range from 24 to 84 months, depending on the loan amount and the borrower’s agreement. Missing payments on a HELOC could lead to foreclosure, whereas defaulting on a Home Depot loan may only impact the borrower’s credit score.

Summary on HELOC vs Home Depot Credit

There are many considerations when getting a Home Depot project loan, credit card or HELOC for your home improvements. A personal loan or credit card could be a good deal if you have good credit, because of the low rate and other benefits. But a HELOC may be better if you need to borrow more money and qualify for a low rate. The interest rate on your Home Depot credit card could be quite low if you qualify for a zero interest home improvement loan program. Just bear in mind that you need to pay that card off before the end of the introductory period.

Both HELOCs and Home Depot loans serve distinct purposes in financing home improvements, but they cater to different financial needs and circumstances. A HELOC is ideal for homeowners with significant equity, offering greater flexibility and lower interest rates. On the other hand, Home Depot loans are more accessible to individuals without home equity, providing a convenient way to finance specific renovation projects with fixed, predictable payments.

The loan experts at Home Equity Mart will be happy to review your home equity finance options, whether it is a HELOC or home equity loan. We will connect you with multiple loan advisors that can offer you many home equity program options and will tailor your loan to your financial needs and credit profile.

 

 

References

• Federal Reserve. (2023). What Should Know About the Home Equity Line of Credit 
• RefiGuide.org  (2024) What is a Zero Interest Home Improvement Loan?
• Home Depot. (n.d.). Home Depot Loan Offers