Whether you’re redoing a bathroom or upgrading your kitchen, home improvements allow you to fully enjoy your residence while also increasing its value. Yet many homeowners put off such projects because they may not have the funds available in a traditional bank account. Thanks to home improvement loans, you don’t have to worry about a major repair or renovation breaking the bank.

There are three home improvement loans we’ll touch on in this article: home equity loans, home equity lines of credit, and personal loans. Keep in mind there isn’t one lending product that works for everyone. Check out the below loan options to see what makes the most sense for you. 

Home improvement loans

Home equity loans

Credit Karma defines a home equity loan as a secured loan for a fixed amount of money. This basically means that you’ve agreed to use your home as collateral. Should you choose to apply for this particular loan, your lender will look at how much equity you have in your home. In most cases, borrowers can access up to 85% of their equity at one time.

Home equity loans are appealing to homeowners because they provide a lump sum of money that can be put toward home improvement projects. For example, if you have $50,000 in tappable equity, you should have no problem remodeling your kitchen and updating a bathroom. Just be mindful that you’ll be on the hook for the application fee, appraisal fee, and/or broker fees with this loan.

Home equity lines of credit

Some borrowers confuse home equity loans with home equity lines of credit. While both lending products use your home as collateral, there are some key differences with how the loans actually work. Whereas a home equity loan provides a lump sum of money based largely on equity, a HELOC limits borrowers to a certain amount during a draw period.

It’s worth mentioning that HELOC terms vary by the financial institution. Chances are you’ll either need to pay back the entire loan following the draw period, or you’ll have to make regular payments for a set duration. There’s also the chance you’ll have to pay off the entire HELOC as a balloon payment once the draw period ends.

So when does it make sense to use a HELOC as a home improvement loan? Well, if you have more than one or two projects on your to-do list, you probably don’t want to go through the hassle of speaking with a lender each time. This is where a HELOC may be the most attractive route. 

Personal loans

Lenders are typically more comfortable approving borrowers for secured loans because there’s less risk involved. However, if you’d rather not put up your property as collateral, you may want to think about using a personal loan to finance your projects at home. Your lender will look at factors such as income, debt, and credit reports as opposed to equity.

More borrowers are choosing personal loans for their home improvement projects because of the quick approval process. As long as you have no problem with a higher interest rate and possible loan origination fees, a personal loan makes a lot of sense. Plus, you will probably be able to pay off this loan quicker than you would a home equity loan or HELOC. 

Home improvement refinancing

Now that we’ve explained the primary home improvement financing choices, let’s discuss how a refinance can be used for these projects. Cash-out refinancing allows you to tap into your equity for home upgrades, much like a home equity loan or HELOC. The difference with a refinance, though, is that you’re simply replacing your current loan with a larger loan and using the difference to pay for renovations.

Here are a few benefits of home improvement refinancing, as referenced from realtor.com:

  • Your new loan may have a lower interest rate, potentially saving you hundreds of dollars each month.
  • You get immediate access to funds without having to qualify for another loan.
  • The improvements you make can increase the resale value of your biggest investment.

It’s also important to understand the cons of using a cash-out refinance to fund your home remodeling projects:

  • It pulls equity out of your home, leaving you with less financial flexibility in the future.
  • It increases the total amount of interest paid as well as the length of your loan.
  • You could find yourself upside down on your loan should property values decline.

Paying for a home improvement project doesn’t have to mean draining your savings account or signing up for a high-interest credit card. Do yourself a favor and work with a lender who will find the most sensible home improvement loan for your situation.

Want to learn more about financing options to upgrade your home? Our friendly real estate experts are here to help. Contact us today at (303) 695-5900.