Everything you need to know – Forbes Advisor
Renovating your home can be a great idea for a number of reasons. Not only will you be able to increase your own quality of life, but you will increase the home’s resale value and your equity.
The only downside is that home renovations can be quite expensive, going up to tens of thousands of dollars or more in many cases. And while it’s always best to save so you can cover those expenses with cash, the reality is, it’s not always possible.
The good news is that there are many different options for home improvement loans that can provide you with the cash you need, for a price, of course. We will help you sort through your different options and choose the best solution for you.
What is a home improvement loan?
There is no official legal definition of a home improvement loan. But generally speaking, it’s used to describe some kind of financing that you take out for home improvement projects. In fact, you can use several different types of financing like a home improvement loan, including personal loans, home equity loans and home equity lines of credit (HELOC).
Types of Home Renovation Loans
The most common types of home improvement loans are:
Personal loans as a home improvement loan
Personal loans are probably the most common type of home improvement loans. They can be used to pay for just about anything, although debt consolidation and home improvements are two of the most common uses. Plus, personal loans are available from a range of traditional and online lenders, so it’s easy to check your eligibility, shop around, and apply for the best terms.
A personal loan is a type of unsecured debt, which means that it is not linked to any guarantee. This means that if you don’t pay off the loan for some reason, creditors can’t take your house or any other collateral (although they can ruin your credit and find other ways to get the money back). This makes a personal home improvement loan a bit riskier for lenders, and they usually pass that cost on to you in the form of higher interest rates.
But since personal loans are relatively straightforward compared to other options, you can get your money out pretty quickly, sometimes in a day or two. Keep in mind that you will receive the money as a lump sum payment. This may not be ideal if you tinker with your home improvement projects over time rather than paying a contractor to finish it all in one go.
Home equity loans as a home improvement loan
Home equity loans are another type of loan commonly used to pay for home renovations. As a type of secured loan, home equity loans use the equity in your home as collateral for the loan. This means that if you don’t repay the loan, your lender can legally confiscate your home. Because of this collateral, this type of loan is more secure from the lender’s point of view and is often a bit cheaper for the borrower.
The tricky part with home equity loans is understanding how equity works and how you can use it to borrow against your home. Equity simply refers to the amount of your home that you own. For example, if you have $ 150,000 left on your mortgage and your house is worth $ 200,000, you have $ 50,000 in equity. As you pay off your mortgage, the amount of equity in your home will increase until you own it completely.
You can expect to be able to borrow up to 85% of your home equity, depending on the Federal Trade Commission. If you have $ 50,000 in equity, that means you are generally limited to borrowing up to $ 42,500. So if you don’t have a lot of equity in your home, maybe because your property has gone down in value or you’ve just started paying off a mortgage, you may not be able to borrow much, if not. nothing.
Because a home equity loan is similar to having a second mortgage on your house, it is also a little more difficult to obtain than a personal loan. Start by contacting your current lender to see what options are available. You’ll likely need to go through a more in-depth underwriting process, which may include paying for a home inspection and closing costs. If you go through all of this and get approved, you will get your money in one big lump sum.
Home equity line of credit as a home improvement loan
Home equity lines of credit– or HELOCs – are kind of a mix between a home equity loan and a credit card. HELOCs give borrowers access to a limited amount of funds as needed, which means the payment can change as you borrow money. But it also means you aren’t paying to borrow money you don’t yet need, which can be handy if you’re tackling home renovations over time.
Like home equity loans, HELOCs are secured by the borrower’s home, and homeowners can typically borrow up to 85% of their home’s value, less their outstanding mortgage balance. Lenders generally prefer that borrowers have at least 20% equity in their home to be eligible for this type of financing. HELOCs also require a longer subscription process, which can be more expensive and time consuming than a simple personal loan.
Which renovation loan is right for me?
Here are some questions to consider when deciding which type of home improvement loan is right for you. But remember, it’s always best to speak with a Financial Advisor if you need help, especially if you plan to tackle a very expensive project.
- Do you have equity in your home? Otherwise, you won’t be able to use a home equity loan or HELOC.
- How important is it to get money fast? Personal loans can provide faster financing than HELOCs and home equity loans.
- How good is your credit? It may be more difficult to get an unsecured personal loan than a secured home equity loan or HELOC if your credit is not so good.
- How important is it to save money? Home equity loans and HELOCs often have lower interest rates than personal loans, but you will need to factor in closing costs.
- Do you need your money in one installment or over time? If you are paying off all of your home improvements at the same time, a home equity loan or personal loan may be the best option. If you are carrying out your project over the long term, a HELOC allows you to use the credit according to your needs.
Uses and current costs of home improvement loans
Home improvements can be as cheap or as expensive as you want and can include everything from replacing cabinet hardware to building an addition. If you are considering a home improvement loan for a large project, try to estimate the total cost of the project before applying for the loan. It can be difficult to do, but you’ll be less likely to run out of money in the middle of the project if you have a likely budget in mind.
According to Cost vs Value Report 2020 from Remodeling Magazine, here’s roughly how much people spend on common home improvement projects:
- Replacement of a garage door – $ 3,695
- Minor kitchen renovation – $ 23,452
- Major kitchen renovation: $ 68,490
- Addition of a wooden deck – $ 14,360
- Replacement of vinyl siding – $ 14,359
- Replacement of a front door – $ 1,881
- Replacement of an asphalt shingle roof – $ 24,700
- Construction of a new addition to the master suite – $ 135,547
- Adding a manufactured stone veneer around the house – $ 9,357
Advantages and disadvantages of the home improvement loan
Alternatives to home improvement loans
Personal loans, home equity loans, and HELOCs are all common ways for people to borrow money to upgrade their homes. But these are not the only ways to finance a home improvement project. Here are two other options that people sometimes use:
0% APR Credit Cards
Putting your home improvement project on a credit card is a risky decision, but if you are careful and use the right credit card, it could work. This strategy works best if you are using a credit card with an APR of 0% introductory period that lasts several months or more, often between 12 and 21 months.
When using a 0% APR card, limit yourself to borrowing what you can fully repay during the interest-free period. This rule makes the strategy best for small projects such as minor home repairs and upgrades. For example, it wouldn’t be a good idea to put your entire $ 135,000 addition to the master suite on a credit card, assuming you can even qualify for such a high credit limit.
Mortgage refinancing with withdrawal
For larger projects, another option is to use a refinancing of collection. This is where you gain equity in your home by refinancing more than you owe on your old mortgage. The rest is paid to you in cash. So, for example, if you owe $ 150,000 on your mortgage and refinance it with a new mortgage of $ 200,000, you’ll get back $ 50,000 in cash to use for home improvements.
Refinancing is no easy task, however. There are a lot of things to consider, like how much additional interest you will pay over time with the new loan and whether you can afford the new payments. But for some people, it’s a good way to get the money they need to improve their home.