There are many approaches to financing home improvement projects. Each has benefits – and drawbacks. Here, we examine the top three strategies: Online personal loans, HELOCs and credit cards.
Online personal loans
Wondering how to finance a remodel without any equity?
Online personal loans are installment loans that are typically unsecured. You can use them for a variety of purposes, including home improvement projects. In the past, you would have gone to your bank to request one. Now, it’s much easier.
Alternative lenders, such as Prosper and SoFi, have been cropping up over the past decade offering online personal loans. In a matter of minutes, you can apply and find out if you’ve been approved. In some cases, you can have the money transferred to your bank account in as little as one day.
How much does it cost? There are many online personal loan companies competing for your business. As a result, if you hunt for the best deal, you can lower your borrowing costs significantly. While the specifics will vary by lender, the costs include a fixed or variable interest rate, and an origination fee (typically 1-6%). The interest and fees you end up paying will depend on your creditworthiness and the length of your loan.
Because most personal loans are unsecured, getting approved will depend on your credit history and financial profile. Lenders are looking for low-risk applicants as they are not able to seize assets if the borrower defaults. As such, most companies have a minimum credit score requirement of between 600 and 700, as well as minimum income requirements.
There are a few lenders, however, such as OppLoans and LendUp, that are more lenient. They will look at all of your financial factors to make a decision, and won’t automatically deny you for a low credit score. So, even if your credit history isn’t strong, you might still have options.
Find the best lender for you
Finding the right lender for you is important. And SuperMoney can help. For our top personal loan lender picks this year, visit us here. Or try the SuperMoney personal loan engine to quickly see what rates you qualify for with leading lenders by clicking here.
Personal loan pros and cons
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If you do have equity in your home, a home equity line of credit (HELOC) is a good option to consider. HELOCs offer the chance to take out a percentage of your home’s equity in the form of a credit line. You can then use the credit line whenever you need and only pay interest on the amount you withdraw. These loan products are available at most banks and financial service companies, such as USBank and Cap West Home Loans.
HELOCs typically have a five- to 10-year “draw period” in which they function as a revolving credit line, similar to a credit card. You can withdraw money at any point during that time up to the maximum limit. When the draw period ends, you enter the “repayment period.” This is the period you make monthly payments for a set term that can range from 10 to 20 years.
The costs associated with a HELOC include interest and, sometimes, an ongoing annual fee (usually around $100). There are no closing costs or application fees in most cases, which give HELOCs an advantage over home equity loans. The interest may also be tax-deductible (check with your tax specialist). So, this route can end up being extremely cost-effective.
Getting approved is much easier than the other two options because the value of your home secures the credit line (meaning less stringent credit requirements are needed). Of course, that’s assuming you have equity in your home. The downside is, if you default, your home could go into foreclosure. You want to make sure you will be able to afford the payments.
Browse HELOC lenders
Of all the reasons you could take out a HELOC, improving your home is one of the best. The improvements you make are likely to increase your home’s value, so the money you pay for improvements isn’t gone with the wind.
Pros and cons
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Lastly, financing home improvement projects with credit cards is another option to consider. You may be thinking, “But don’t they have higher interest rates that installment loans?” Not always.
While credit card interest rates are often higher, many companies offer cards with interest-free introductory periods. When this is the case, you get an introductory period to carry a balance without paying any interest. That’s hard to beat! Additionally, there are usually no fees involved with opening a credit card, and many cards have no annual fees.
What’s the catch?
After the promotional, 0% period ends, your interest rate will jump up to the normal rate. This can result in expensive interest charges if you are carrying a large balance. Because of this, it’s important to figure out if you can pay off the balance during the promotional period. If you can’t, you might also plan to transfer the balance to another promotional card when this introductory offer ends, or refinance the debt with a personal loan.
Credit cards are unsecured lines of credit, which means companies will be looking to your credit and financial profile. To qualify, you will need a relatively good credit score with a strong history of making payments on time. In addition to affecting the interest rate, your creditworthiness will also play a role in determining your maximum credit limit.
You’ll want to ensure you can get approved for an amount that will cover your home improvement project. Casey Fleming, Author of The Loan Guide: How to Get the Best Possible Mortgage, advises to “make sure you have enough funds to complete the project, as running out of money can lead to huge trouble.”
Check here for a list of credit cards with 0% introductory periods.
Pros and cons
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Aside from our top recommended options, here are a few others to consider.
Alternate financing solutions
The U.S. Department of Housing and Urban Development (HUD) has a few programs that can help homeowners finance improvements such as the FHA 203k and Title 1 loan.
What is a 203k renovation loan?
The 203k program provides homeowners (who meet the eligibility criteria) with a loan that covers the costs to buy a house and to rehabilitate or repair it. So, for those wondering, “Can I get a mortgage to include renovation costs?” the answer is yes. If you’re interested to learn more, you can visit us here.
What is a Title 1 loan?
Title 1 loans are part of another program backed by the FHA. Through this program, homeowners can receive loans up to $25,000 from participating third-party lenders for practical improvements; in other words, no luxury upgrades. To learn more, you can read about it here.
Although these programs often have a lengthy application, approval, and disbursement process, they can be beneficial.
Lastly, in many cases, contractors will offer financing options. Depending on the project and the offer, these can be attractive. But be sure to read the fine print carefully. Once you understand the rates and terms, shop around and compare them to other lenders.
Finance your home improvement projects
Now you know the best ways to finance your home improvement projects. All that is left to do is to weigh the pros and cons, research lenders and costs, and decide which is best for you. It won’t be long until you can start breaking ground on your next project!