5 Tips for a Home Improvement Loan
Obtaining money for your home for renovations, improvements, or other projects can be a stressful process. If you don’t know your options, it can be challenging to know where to turn. Luckily, we can help by examining the different types of loans that you can use for these projects.
There are three major types of loans: personal loans, home equity loans, and home equity lines of credit (HELOCs). Each one has distinctive features that are better for different people depending on their plans, their credit, and their finances.
For this situation, you can take out a home improvement loan. This is an unsecured type of personal loan that doesn’t require any collateral. You can borrow smaller amounts and repay the debt in a shorter amount of time.
Home improvement loans typically allow you to borrow between $5000-$50000, with even more significant amounts available for those with good credit scores and repayment histories. The APR is usually lower than other types of loans, as well as lower fees.
Home improvement loans are unsecured, meaning you are not risking your property. There are higher rates because of this, but the peace of mind is well worth it.
Flexibility is a crucial advantage of these loans as well since they don’t tie you down for a long repayment period or a large amount. Short term loans and a more extensive range of amounts are what attract most people to this option.
Home improvement loans are not tax-deductible like other choices, which is a massive con for many people. They also are not suitable for larger projects that require higher amounts of cash to finance.
Home Equity Loans
Equity is the value of the interest in your home. Home equity loans allow you to access the value of your property to leverage financing for home improvement projects. They are different from home improvement loans in that they offer more substantial sums of money and extended repayment periods. They act as a second mortgage.
These loans use your home as collateral so you can have access to extra cash for important projects. There is a lower APR than other loan options and a fixed rate. The amount you receive will ultimately depend on the value of your property.
Things To Consider
The fees of a home equity loan are going to be higher than a personal loan due to the costs being more like a mortgage. This can cost you hundreds of dollars in repayment.
If you sell your home before the repayment period ends, you could have to repay the outstanding debt immediately. If you cannot pay, then you could lose your home and ruin your credit.
Since your home is being used as collateral, there is always the risk of losing it if you cannot repay the loan. Be sure to calculate your debt to income ratio correctly.
Home Equity Lines Of Credit (HELOCs)
HELOCs give you access to credit using your home’s value as collateral. Working similar to a credit card, HELOCs give you a maximum amount you can borrow over some time. This way, you only pay interest on what you borrow rather than a large initial amount.
Things To Consider
HELOC fees involve everything from appraisal costs, late fees, origination fees, and more. This adds up to revolving debt.
Balloon payments mean that when the HELOC expires, you will have to repay the outstanding debt immediately. If you cannot pay it, you can lose your home.
Some lenders will require you to take out a minimum amount, which may be more than you need. This limitation on withdrawals could cost you more in interest and repayments.
If you are unsure about applying for the options listed above, you should consider cash refinancing. This would repay your existing mortgage as you would take out a loan that covers the cost of your property. Any excess funds could be used for future plans.
The best loan option will be determined after careful review of your financial history and future plans. Depending on what you want to do to your home will influence the amount you need to borrow, which will, in turn, influence which loan you apply for. Carefully analyze your finances on your own or with a financial advisor before making any decisions.
Funding a home improvement project doesn’t have to be stressful. There are many different options to choose from to get the money you need. Depending on your needs, your financial history, and what is best for you and your family will overall determine the direction you should take.
Examine the differences between the loans side by side with your financial history and needs in hand. This way, you can make a decisive decision!