Upgrading your home is almost always a wise investment. Home improvements can considerably raise the resale value, not to mention, increase your enjoyment and comfort in your home. But home improvement projects, big or small, are rarely cheap. And unless you've been squirreling away some extra cash throughout the years, you'll most likely be in the market for a loan. But what type of loan do you need for these types of projects?
First Off, Know the Facts!
Home improvement loans allow you to pay for renovations and repairs. And the best part? You don't always have to use your home as collateral. Home improvement loans are typically unsecured personal loans, but you can also back them up using your home's equity.
If you're looking for financing, you will need to understand how home improvement loans work so you can choose the financial solution that works best for you and your situation. This will require a bit of legwork on your end – comparing interest rates, fees, and terms. Always compare multiple offers before deciding on the lender that's right for you. You want a loan that suits your current finances and the size of your project.
To help make this process easier, we have compiled everything you need to know about home improvement loans.
Understand your Options!
You may have more options available to you than you think. For example, you don't have to pledge yourself or your earning power to remodel your home.
1. Home Equity Line of Credit (HELOC)
One of the biggest perks of owning a home is that you are constantly building equity over time. Home equity can help you access cash for renovations at lower interest rates than personal loans. In addition, HELOC loans are a great financing option as they allow for quick access to funds. A HELOC is a revolving line of credit, meaning you can access the funds whenever you need to.
However, since you are using your home as collateral, you're at risk of losing your home if you default on payments. Another thing: HELOCs have variable interest rates, and your minimum payment depends on the market’s conditions.
2. Home Equity Loans
There's little difference between a home equity loan and a second mortgage. It's a fixed-rate loan paid out in a lump sum that you'll pay back in instalments over a predetermined number of years. One advantage of home equity loans is that you don't have to worry about changes to your payment due to changes in the interest rate.
The downside is, you have less payment flexibility when compared with a HELOC loan.
3. Mortgage Refinance
Refinancing allows you to turn your home equity into cash. Essentially, you're taking out a new loan to replace your original mortgage, and you get to pocket the difference, if there is any. This option can give you the extra cash you need to tackle some home repairs.
Mortgage refinancing does come with some extra costs, including appraisal and origination fees, taxes, and closing-related charges. But, if you can lower your interest rate, it's well worth it in the long run.
4. Personal Loans
Let's say you don't want to secure your loan improvement project with your home. In this case, getting a personal loan is a great option. These unsecured loans are offered by banks, credit unions, and some online lenders.
The loan amount and interest rate vary based on your credit score and current financials. And defaulting on this type of loan will cause you to take a hit in those areas. Typically, these loans are best for small improvement projects such as window replacements or installing a new closet system.
5. Credit Cards
If you want to make minor repairs or smaller upgrades like installing a new water heater, a credit card can help cover the expense. In addition, some credit cards are interest-free for the introductory period meaning you get to repay the renovation cost over that time without paying extra in interest.
Tackle Home Improvements Strategically
Do your research and always build a buffer into your budget. No matter the option you choose, your monthly expenses are bound to rise.