Do you feel like your home is in constant need of repair? If so, you are not alone. Many people frequently find a detail or two they would like to change about their house. However, gathering the necessary funds for such an investment can be a challenging task. Taking out a home improvement loan is one of the most popular options among homeowners that need help covering renovation costs.
Roof damage, malfunctioned garage doors, outdated furniture — you can quickly solve all of these issues by getting a home improvement loan. Nevertheless, you may be unsure whether taking on such a significant financial commitment is the best way to go about your home improvement project.
Here, we would like to help you solve this dilemma. Below, we explain what a home improvement loan is, mention the most common types of this kind of loan, and list the critical factors you need to consider before taking one. Let's get started.
In short, a home improvement loan is a sort of financing whose main purpose is to cover the costs of home renovations and repairs. Borrowers can use it for smaller jobs (such as redecorating the backyard or repainting the walls) or massive projects (like adding a new room or doing a complete kitchen makeover).
Regardless of the size of your home renovation project, it is worth looking into various loan options before making the final decision.
Although cash is still king, there are many available home improvement loan options to choose from. Finding the best one for you requires learning more about the pros and cons each of them provides. Here is a quick rundown of the most popular ones:
If you manage to build up some equity in your home, taking a home equity loan might be the best option for you. Most people use this type of loan for a significant, one-time project.
Taking a home equity loan is similar to a second mortgage — you receive the funds as a single payment upfront. Thanks to your home being used as collateral, lenders can offer you lower interest rates, making the process of paying back the sum you borrowed much more manageable.
Also, it is worth noting that you can borrow up to one hundred percent of your equity, and you will have to pay the origination fee. So, make sure you budget your home improvement project carefully before exploring this option.
A home equity line of credit is similar to a home equity loan, but it works more like a credit card. It allows you to withdraw cash up to a pre-approved limit. This approach gives you more flexibility, as you can additionally tap into your funds whenever you need it.
The main drawback of this type of loan is that your interest rates might grow as you borrow more money and are usually higher than in the case of home equity loans — this is the cost you have to pay for added flexibility. Additionally, a bank or credit union can change repayment terms.
Not as long as two years ago, taking an unsecured personal loan was nothing unusual. However, after the sudden COVID-19 outbreak, personal loans slowed to a near-halt. Nowadays, the situation is a tad better for lenders, but not by a large margin.
The main reason why people avoid taking personal loans is the interest rates they feature. These rates are usually higher than the ones we can find in a home equity loan or HELOC.
With this being said, personal loans are an excellent option if you lack equity to borrow from or do not want to put up your house as collateral. Besides, if you have a high credit score, your interest rate will not be as harsh.
To correctly estimate whether you should take a home improvement loan or not, you need to consider a few critical factors. Similarly, if you are already sold on the idea but are still unsure what type of loan would be the most beneficial for you, you should think about these elements:
● Home equity — The higher your property's value, the better the return on a home equity loan or HELOC. If you do not have much home equity, you might be better off going for a personal loan or using your credit card to cover the expenses.
● Credit score — If you have a good credit score, getting a personal loan may be the right solution for you. On the other hand, if your credit score is not that great, you may find it challenging to find a credit union willing to lend you money.
● Length of the project — If you plan on undertaking a few small or longer-term projects, HELOCs are probably your best option. Otherwise, securing home equity or an unsecured personal loan should be your primary goal.
Besides, you should always shop around to find the best offer. Different lenders offer varying interest rates and fees. As a result, it is best to take your time and do some research before signing the agreement. When searching for the best lender, things to look out for include low APR (annual percentage rate), positive reviews, and no additional fees.
The Bottom Line
So, should you take a home improvement loan? To correctly answer this question, you need to consider many factors, such as your home equity, your credit score, and what kind of project you wish to undertake. Without taking this step, you run the risk of accumulating debt and suffering from financial issues down the road.
Ultimately, the best type of loan for home improvements depends on your finances. If you have strong credit, a stable source of income, and relatively few other debts, you have many more available options than someone who does not possess these features. Use them to your advantage and enjoy living in your newly renovated home.