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A home renovation is beneficial for many motives. In addition, you’ll enhance the quality of your life and increase your house’s resale value as well as the value of your net.
The one drawback is that house renovations are often costly, with prices ranging from hundreds of thousands of dollars. While building up savings to pay for these costs in cash is always advisable, it’s rarely feasible.
It’s a good thing that there’s a myriad of options available in mortgages for home improvements that will provide the money you require–for the cost, of course. So let us help you evaluate your options and help you make the right choice for you.
What Is a Home Improvement Loan?
There’s no legal definition for a house improvement loan. But, generally, the term is described as a type of finance you get for projects requiring home improvement. You can utilize a range of home improvement loans. These include personal mortgages and home equity loans—lines of credit for home equity (HELOCs).
Types of Loans for Home Improvement
The most commonly used kinds of loans for home improvements are:
Personal Loans as a Home Improvement Loan
Personal loans are most likely the most commonly used home improvement loan. They can cover almost everything, but debt consolidation and home improvement are among the principal use cases. Additionally, personal loans can be obtained from various traditional and online lenders. Therefore, it’s simple to determine your loan eligibility and compare rates to find the best suitable conditions.
Personal loans are a form of unsecured credit. This means any collateral does not back it. It means that should you don’t pay back the loan for a reason, the lender can’t take the house or any other asset as collateral (although they may cause damage to your credit score and seek alternative ways to obtain the cash returned). The result is that a home improvement loan is less risky for lenders. They typically pass the cost on to you regarding increased interest rates.
However, since personal loans are relatively easy compared to other alternatives and you’ll get cash quickly–sometimes in one or two days. Be aware that you’ll receive the money in one lump sum payment. This might not be the best option for those attempting DIY home improvements over time instead of paying an expert to complete the entire project in one go.
Home Equity Loans as a Home Improvement Loan
Equity loans for homeowners are yet another kind of loan typically employed to finance home improvements. In the context of secured credit, home equity loans use the equity in your home to serve as collateral to obtain the loan. If you fail to pay the loan, the lender could take the house from you. This is because of the guarantee. This kind of loan is more secure for lenders and can be less expensive for the person who is the borrower.
The trick with the home equity loan is understanding how equity functions and the best way to use it to fund your house. Equity refers to the value of your home that you are the owner of. In the example above, if you are left with $150,000 on your mortgage, and the house is worth $200,000, you can have $50,000 of equity. When you can pay off your mortgage, the equity within your house will grow until you can fully own your home.
According to the Federal Trade Commission, the average homeowner can take out loans up to 85 percent of their home’s equity. If you own $50,000 in equity, you can only borrow as much as $42,500. Therefore, if you don’t possess an abundance of equity in your property, perhaps because the property’s value has dropped or because you’ve just begun repaying a loan, you might be unable to take out the amount you need.
As home equity loans mortgage for equity in your home can be compared to another mortgage secured on your house, it’s somewhat more complicated to qualify for than personal loans. Begin by calling your current lender to determine what options you have. Next, you’ll likely have to undergo a thorough underwriting process that could include the home inspection and closing fees. If you complete all the steps and are accepted, you’ll receive your funds in one big lump payment.
Home Equity Line of Credit as a Home Improvement Loan
Home equity credit lines–or HELOCs are a mix of a home equity credit line and a credit card. HELOCs allow borrowers to access the amount they need on a ‘need-to-know’ basis meaning that the amount they pay could be altered as they take out loans. This also means there’s no obligation to pay for funds you do not need. This can come in handy for home improvement projects at a later date.
As with home equity loans, HELOCs have a security based on the borrower’s homeowner. Typically, homeowners can get as much as 85% of the property’s value minus their outstanding mortgage balance. In addition, lenders usually require applicants to have at minimum 20 percent equity in their home to qualify for this kind of loan. HELOCs also require a lengthy approval process that is more expensive than a typical personal loan.
Which Home Improvement Loan is Right for Me?
Below are some things to be aware of when deciding which type of loan for home improvements suits you. Remember, it’s better to talk with a financial adviser for assistance, particularly if you’re considering tackling a large-scale undertaking.
- Do you own equity in your house? Using a home equity loan, or HELOC, will be challenging if not.
- What is the most essential thing to obtain quick cash? Personal loans can offer faster financing compared to HELOCs and home equity loans.
- What is the quality of your credit rating? It might be more challenging to qualify for an unsecured credit card than HELOC or home equity loan when your credit score isn’t good.
- What is the most important way to conserve cash? Home equity loans, as well as HELOCs, usually have low-interest rates as compared to personal loans. First, however, you’ll need to think about closing expenses.
- Do you require cash in a lump sum or in a time-based manner? A personal or home equity loan could be the best alternative if you pay the entire cost of home improvements in one go. However, if your work is being completed with time, the HELOC permits you to use credit whenever possible.
Common Home Improvement Loan Uses and Costs
Improvements to your home could be as inexpensive or costly as you like and could comprise anything from replacing the cabinet hardware to building an extension. If you’re contemplating the possibility of a loan to improve your home for the duration of a big project, make sure to calculate the overall costs of the project before when applying to borrow. This isn’t easy to achieve. However, you’re less likely to be in debt during the work If you’ve got an estimated budget.
- Repairing the garage door costs $3,695.
- A minor kitchen renovation costing $23,452
- A significant kitchen renovation costs $68,490.
- Adding a wooden deck–$14,360
- Replacing vinyl siding–$14,359
- Replacing a doorway in the entryway costs $1,881.
- Replacing a roof with asphalt shingles–$24,700
- A new master suite expansion–$135,547
- The addition of a veneer made from stone on the exterior of the house — $9,357
Home Improvement Loan Pros & Cons
| Home Improvement Loan Pros & Cons | Pros | Cons |
| Personal Loan | * Fixed monthly payment you don’t have to utilize the equity in your home.* Can get funds more quickly | * Cash-out is in one lump amount* The potential for higher interest rates |
| Home Equity Loan | * Fixed monthly payment* Possibly lower rates of interest | * Paid out in one lump amount* You must be able to demonstrate equity in your home.* Could have closing costs* Could require a home inspection |
| HELOC | * Take out cash in the amount you require over time.* The potential for lower rates of interest | * Must be able to demonstrate equity in your home.* Might have closing cost* Might require a house inspectionThe monthly payments can fluctuate with time. |
Alternatives to Home Improvement Loans
Home equity loans and HELOCs are the most common methods people use to take out loans to improve their homes. They’re, however, not the only options to finance a home improvement project. There are other ways individuals may consider:
0% APR Credit Cards
Making your home improvements using a credit line is an unwise decision; however, If you’re cautious and choose the appropriate credit card, you could achieve it. It is best to do this when you have one that offers an initial introductory rate of 0% that runs for several months or longer, typically between twelve and 21 months.
If you are using an APR-free card, you should limit yourself to the amount you can repay entirely in the period interest-free. This strategy is ideal for smaller projects for home repair work, such as minor ones or upgrades. As an example, it would not be wise to place your entire $135,000 master suite on a credit card, assuming that you’re eligible to get a credit limit this high.
Cash-Out Mortgage Refinance
In the case of larger projects, a different possibility is to go with a refinance with cash-out. It is a way to access your home’s equity through refinancing at a lower amount than the debt you have on your mortgage. The rest is repaid to the borrower with cash. For instance, if you have an obligation of $150,000 on your mortgage and then refinance it using an additional $200,000 mortgage, you’ll receive $50,000 in cash that you can use to pay for improvement to your home.
The process of refinancing can be a daunting one, however. There are plenty of aspects to consider, like the amount you’ll have to pay for interest in the course of the loan and if you’ll be able to pay for the additional payments. For some, this is a great option to obtain the cash needed for improvements to their home.