Is your downtown bungalow stuck in the 1980s? If so, it might be time for a full home remodel. But what if you don’t have the cash to hire a professional to swap out the shag carpet and wood paneling of yesteryear? That’s where a home improvement loan comes in.
A home improvement loan is a financing tool that allows homeowners to borrow money for necessary repairs. These loans come in different shapes and sizes, each designed with a different borrower in mind. The right lending option for you depends on factors like:
Keep reading for more information on how a home improvement loan can bring new life to your home.
A home improvement loan is any type of financing used to fund home repairs. You might be borrowing money from a bank or charging expenses to a credit card. Regardless of the lender, most home improvement loans are repaid over the course of several years.
What’s the catch? Like any other lending option, home improvement loans charge interest. Depending on the type of loan you choose, this interest rate may be very low (0-4%) or very high (>25%).
Generally, these loans fall into one of two categories:
Borrowers generally prefer secured home improvement loans because they offer lower interest rates and more flexible loan terms. However, since these financing tools require some form of collateral (typically your home), they can be risky.
A home equity loan, also called a second mortgage, allows you to borrow against the equity in your home.
Equity is the difference between your current mortgage balance and your home’s value. So, if you owe $350,000 but your home is worth $400,000, you have $50,000 of equity. Lenders generally allow homeowners to borrow around 80-85% of their home’s equity (about $40,000 in this example).
This financing option offers competitively low interest rates and flexible loan terms. However, if you default, the lender can foreclose on your home.
Like a home equity loan, a home equity line of credit (HELOC for short) allows a homeowner to borrow against their home’s equity. However, instead of receiving a lump sum, you’re granted a revolving line of credit.
A HELOC is more attractive to homeowners who aren’t sure how much their remodel will cost. Rather than pay interest on a huge amount, you can withdraw money on an as-needed basis.
The downside? HELOCs are typically repaid at a variable interest rate. That means your APR will ebb and flow based on market conditions.
Homeowners may also consider a cash-out refinance. With a cash-out refinance, you replace your existing mortgage with a new, larger loan. This loan pays off your original mortgage. Then, you can use the remaining cash for home repairs (or anything you’d like).
For example, let’s say that you owe $150,000 on your current mortgage and your lender qualifies you for a $200,000 cash-out refinance. At closing, you would receive a check for the difference ($50,000).
Since you receive a large lump sum, cash-out refinances are great for intensive home repairs like a kitchen remodel. However, this is only a solid financing option if you plan on staying in your home for several years. If you plan to move soon, a cash-out refinance isn’t for you.
With an unsecured loan, there’s no risk to personal property. That means you don’t have to worry about losing your home or other assets if you default. However, you can expect higher interest rates and a shorter repayment term.
A personal loan is the most common type of unsecured home improvement loan, and with good reason. Homeowners can qualify for a personal loan within minutes, especially if they apply with their current bank or credit union.
Since no collateral is needed, the approval process is fairly straightforward. Your lender will likely assess your creditworthiness and evaluate your debt-to-income ratio. Once approved, the funds will be transferred to your bank account within a few days.
A personal loan is a great option for homeowners who don’t have enough equity in their homes to qualify for a secured lending option. The downside? You might get stuck with a high interest rate, especially if you have less-than-perfect credit.
Have you considered tapping a credit card to fund your home improvement project? If not, give it some thought. Many credit cards offer “teaser” rates that are well below the market average. Some even offer zero-interest periods for one to two years.
However, you should only use a credit card if you know you’ll be able to pay it off before the promotional period ends. If you don’t pay back your debts, you could face astronomically high interest rates.
That being said, credit cards work best for smaller home improvement projects like new cabinet hardware or an upgraded vanity.
Before you rack up credit card debt or refinance your mortgage, you need to select a home improvement lending option that suits your needs.
Start by asking yourself these questions:
If it’s less than $20,000, there’s no need to pay the closing costs associated with a secured financing option. Instead, opt for an unsecured personal loan with a low interest rate or a credit card with a zero-interest period.
If you hope to borrow a large sum, a secured home improvement loan is best. However, to qualify for this lending option, you must have equity in your home.
Connect with your mortgage lender to determine your current balance. Then, use real estate websites like Zillow and Redfin to compare your house to other properties in the area. This can help you estimate your equity.
With a cash-out refinance, you’ll walk away with enough money to upgrade your shag carpet. However, you’ll also walk away with a higher mortgage payment. Do you have enough wiggle room in your monthly budget to afford this?
Comparatively, if you move forward with a home equity loan, you’ll have not one mortgage but two. Can you juggle two payments each month?
Once you have a better idea of how you’d like to fund your home remodel project, reach out to a local lender like Dash Home Loans. As a trusted partner of Team Portico, Dash Home Loans offers dozens of financing options at great rates.
What’s even better? Dash has reimagined the lending process, making it easier and speedier than ever. That means you’ll receive the money needed for your bedroom overhaul faster than you can say “home sweet home.”