Financing a $20k to $100k Backyard: HELOC vs Lender Financing vs Cash

Four, for most households: cash, a home equity line of credit, a home equity loan, or a personal loan arranged through a lender or marketplace.

A disclosure first. Gallardo Custom Builds offers financing through Acorn Finance, and we name them in this guide. We are a builder, not a lender or a financial adviser. We do not earn more by steering you to one option over another, and nothing here is a rate quote. Rates change weekly, so this guide has none in it. It explains how each product works, using the federal regulators' own explanations, so you can compare real offers when you have them.

It is a credit line secured by your house, usually at a variable rate, with two phases.

The Consumer Financial Protection Bureau describes it this way: you can borrow up to your limit at any time during the draw period, which could last 10 years, and then you stop borrowing and enter the repayment period. Payments can change from month to month because the rate is usually variable. In some cases you may have to repay the whole balance as soon as the repayment period begins. Some plans require a minimum draw each time, the CFPB's example is $300, or a minimum outstanding balance, and a lender can freeze the line if your home's value falls significantly.

The CFPB's plainest line is the one to keep in mind: if you fall behind or cannot repay on schedule, you could lose your home. A HELOC suits a phased project well, because you draw only what each phase needs. It suits someone who wants a predictable payment less well.

Often it fits better, because a fixed-price build needs a known amount on a known date.

The Federal Trade Commission's summary is that a home equity loan is a lump sum with a fixed annual percentage rate and equal monthly payments over a fixed term, while a HELOC works more like a credit card, with a variable rate and borrowing only what you need. Some HELOCs let you convert part of the balance to a fixed rate; the CFPB notes the fixed rate is usually higher than the variable one.

If your project has one contract price and a clear schedule, a lump sum at a fixed rate is easy to plan around. If you intend to build a patio this year and a kitchen in two years, a line of credit may match the pattern better. Either way the house is the collateral.

Acorn is a marketplace, not a lender: you prequalify once and see offers from its lending partners.

By Acorn's own description, prequalification uses a soft credit pull that does not affect your score, and you are matched with lenders offering personal loans of up to $100,000. The lender you choose makes the loan and handles your payments. A hard credit pull happens when you pick an offer and proceed, which can affect your score. Acorn describes these personal loans as having fixed rates and fixed monthly payments, with terms typically from 2 to 12 years.

The appeal is speed and the fact that the house is not the collateral in a typical personal loan. The trade-off to check is the rate: compare the offer's APR against what your bank or credit union would give you on a home equity product. Using Acorn is never a condition of working with us, and you are free to finance the project any way you like.

Possibly, for home-secured borrowing spent on substantially improving the home. Ask a tax professional.

IRS Publication 936 says interest on a loan secured by your home is not deductible to the extent the money was not used to buy, build or substantially improve the home. If a home equity loan or HELOC is used to substantially improve the residence that secures it, the interest may be deductible as home acquisition debt, subject to limits: mortgage interest on the first $750,000 of debt, or $375,000 if married filing separately, for debt taken on after 15 December 2017.

Whether a particular patio, pavilion or kitchen counts as a substantial improvement, and whether itemising beats your standard deduction at all, are questions for your accountant. We mention it because it is a real difference between home-secured and unsecured borrowing, not because it should decide the project.

When it does not empty the reserve you would need for a job loss, a roof or a medical bill.

Cash has no interest, no closing costs and no lien on the house. The cost is liquidity. Many households in the position to build a $60,000 backyard could write the cheque but choose to borrow part of it to keep savings intact, which is a reasonable decision either way. A middle route is phasing: build the base, drainage and patio now with cash, and the cover or kitchen later. Our phasing guide explains which parts must be done first so nothing is torn up later.

If you do pay cash, the protections still matter. Pay against completed stages, keep every receipt and change order, and hold back the final payment until the walkthrough is done and any snag list is cleared. Cash buyers sometimes skip the paperwork a lender would have demanded, and that paperwork protects you as much as it protects a bank.

By total cost over the life of the loan and by risk, not by the monthly payment alone.

A low monthly payment often means a longer term, and a longer term usually means more interest paid in total. Put each offer through the same simple sum: the monthly payment multiplied by the number of payments, plus every upfront fee, minus the amount borrowed. That is what the money costs you. For a variable-rate HELOC, run the sum at today's rate and again at a higher rate, because the payment can change month to month.

Then weigh the part the arithmetic misses. A home equity product puts the house up as collateral. A personal loan normally does not, but often costs more. A shorter term costs less in total but squeezes the monthly budget. None of those is the wrong answer; the mistake is comparing offers that differ on three of them at once without noticing. If it helps, bring the offers to the design visit and we will make sure the project numbers you are comparing against are the same in each case.

A three-day right to cancel, required disclosures, and your own caution about wire requests.

The FTC explains that you can cancel a home equity loan or HELOC for any reason within three business days when your main home is the collateral. It does not apply to a vacation home. Lenders must disclose fees such as application, annual, appraisal and credit report fees before closing. The FTC also warns: do not wire money in response to an unexpected email about last-minute closing changes, because that is a common scam. Call the lender or title company on a number you already have.

Against progress, in writing, whatever the source of the money.

A sound contract ties each payment to a visible stage: a deposit to schedule and order materials, then payments at milestones such as excavation and base complete, structure complete and final walkthrough. Paying in full up front for a large outdoor project is not normal, and a builder who asks for it should explain why. Our guide to reading a quote covers what the payment terms should say, and budgeting an outdoor living project covers setting the number in the first place.

The same questions, whichever product you are comparing.

• What is the APR, and is it fixed or variable?
• If variable, what index is it tied to, and is there a cap?
• What are all the fees, including any annual or early payoff fee?
• What is the monthly payment now, and what could it become?
• Is my house the collateral?
• For a HELOC: how long is the draw period, and is there a balloon payment at the end?
• How and when is the money released to pay the builder?

Write the answers down side by side. Two offers that look similar on the phone often differ on fees, term or collateral, and the differences only show on paper.

Projects with Gallardo Custom Builds start around $7,500. Francisco "Paco" Gallardo, the owner, walks the site himself before any number is given, because what is under the ground and what you want to do with the space both change the answer. The visit costs nothing. Financing is available through Acorn Finance. Call (479) 379-2226 or send the project form.