Do you dream of building a pool in your backyard or hosting summer barbecues on a brand new deck? One of the biggest perks of owning a home is the freedom to customize it in nearly every way imaginable. Along with that freedom comes the responsibility of making major repairs.
Whether you’re renovating your home out of necessity or making luxurious upgrades, chances are your home improvement projects won’t be cheap. For example, the average cost of replacing a roof is about $19,000, and some remodeling projects can cost $100,000 or more.
Home improvement financing Options
While using your savings is the best way to pay for these projects, it’s not always possible. If you want to make home improvements, but don’t have the extra cash, don’t despair. Home improvement loans are available in many forms.
The best choice for a home improvement loan depends on the cost of your project and your financial situation. Here are some options to consider.
- Home equity loans
- Home equity lines of credit (HELOC)
- Mortgage refinancing
- Credit cards
- Personal or unsecured loans
- Federal Housing Authority (FHA) loans
Home Equity Loans
Home equity is the difference between the market value of your home and the amount you have left to pay off on your mortgage. It’s an asset that represents the part of the home that you have paid for, and it can increase over time.
A home equity loan is a kind of second mortgage. It allows you to borrow against your home equity in exchange for a lump sum of cash. The loan is paid back in fixed monthly installments.
According to the IRS, interest on these loans is tax-deductible up to $100,000. Although you can lose your home if the loan is not repaid, the benefits can often outweigh the risks.
Why Choose This Loan?
- Easier to qualify
- Lower interest rates than unsecured loans
- Opens up large sums of money for big home improvement projects
Home Equity Lines of Credit (HELOC)
Home equity lines of credit (referred to as HELOC) also use your house as collateral but offer more flexibility than a home equity loan. This type of loan is good for long-term projects. Rather than receiving a lump sum of cash, you can choose smaller amounts to borrow over a period of time. The amount you’ll pay in interest is low compared to other types of loans.
“Remodeling is at an all-time high, and it’s much more efficient to fund that activity with a four percent HELOC than a credit card charging 17% interest,” said Jeff Taylor, managing director of Digital Risk (source).
If you’re unable to pay off the full amount of your monthly installment, many HELOC lenders also offer the option to pay off only the interest until you’re back on your feet.
If you’ve owned your home for a long time, mortgage refinancing is a practical option. Paying a lower monthly mortgage rate allows you to “cash out” and use the money you save on home improvement projects.
This type of loan is best for home improvement projects that will increase the resale value of your house, such as remodeling your kitchen.
If you’re planning to make smaller improvements (costing less than $15,000), you can use a credit card instead of taking out a home loan. However, credit cards carry high interest rates, and you could spend more money paying it off than the project is worth. To avoid this, use credit cards for projects you can pay off quickly.
New homeowners, or those who don’t have a lot of home equity, should consider taking out a personal loan. You can borrow less than a home equity or HELOC requires. If you’re planning on making smaller home improvements, such as installing windows, a personal loan is a good way to go. Some lenders offer loans as little as $1,000. Unlike home equity loans, you won’t be at risk of losing your house if you can’t repay the loan on time.
If you don’t have the equity necessary to make home improvements, you may qualify for a government loan. The FHA loan programs include the Title 1 program and the 203(k) program.
Title 1 provides loans up to $25,000 for necessary renovations, such as replacing a roof. The FHA 203(k) program helps homeowners finance their mortgage to make repairs or purchase fixer-uppers.
Compare home improvement loan options
No matter what type of loan is best for you, finding a lender to work with is key. Compare the rates of leading lenders for personal loans and home loans. If you’re ready to take the plunge, use our loan engine to get pre-approved loan offers without hurting your credit score.