Either your house serves as collateral for the loan, or it is unsecured.

Loans for home improvements are sometimes referred to as “home improvement loans,” and they are typically unsecured personal loans. There are other financing options available when you’re ready to upgrade your house, such as personal loans.

Home equity, credit, and financial objectives all play a role in determining the best approach to pay for a remodel. Listed below are six different types of home improvement loans and how they function.

Personal loans: a brief overview

There is no collateral involved in securing a personal loan to fund home renovation projects. With a personal loan, lenders don’t normally look at any information regarding your home.

The amount of money you can borrow and the interest rate are determined by your financial credentials, such as your credit rating and income. A personal loan may be an alternative if you don’t have a lot of equity in your home or if you don’t want to put your home up as collateral for a personal loan. Personal loans might have a negative impact on your credit score if you don’t pay them back in full or on time.

Dana Menard, a certified financial planner located in Minnesota, notes that personal loans are typically faster than home equity loans. As a result, you’ll pay off your debts more rapidly. Many personal loan periods are limited to five or seven years, whereas home equity possibilities can last decades.

A good credit score of 690 or better is required to get the highest interest rates on personal loans, but some internet lenders provide home renovation loans to consumers with less-than-stellar credit. Calculate your monthly payments and compare them to your budget to see if you can afford the project.

Refinance with cash-out

Changing your mortgage terms and taking cash out of the equity in your home are the two main benefits of doing a cash-out refinance. Proceeds from the sale will be used toward your project.

Refinancing normally costs between 2% and 5% of the original mortgage amount. To make sure the new mortgage is worth it, compare your closing fees to your project’s budget. It’s possible that the $12,500 closing costs for a refinance of a $250,000 home may outweigh the money you’re planning to spend upgrading.

If you plan to stay in the house for a long time, you’ll be able to recuperate more of those costs. He typically advises them to stay for at least seven years.

A line of credit based on your home’s equity

To get a HELOC, you must have equity in your home, which is the worth of your house minus any outstanding debt. As a result, you’re putting your home up as collateral for the loan.

HELOCs have a draw period, often 10 years, during which you can use some or all of the money you’ve been approved to borrow. Interest-only payments are typically made throughout this period, according to Rocco. Interest and principal are due at the end of the repayment period.

Rocco recommends a HELOC if you expect to sell in the near future because you don’t have to pay back the principal throughout the draw term. There is no need for you to pay back any money that you haven’t repaid from the sale of your property.

When you’re not sure how much the project will cost, a HELOC allows you some leeway. Menard recommends using them for projects that need to be completed in stages, such as a basement remodel.

Because the interest rate on a HELOC might fluctuate, it’s not the best choice if you’re worried about your monthly payment going up, according to Menard.

Equity loans for home owners

If you already know how much you’re planning to spend, a fixed-rate home equity loan is a better option than a HELOC. With this second mortgage, you get the money in a lump sum, and you begin paying back both interest and principal as soon as you receive it.

Because each payment is applied directly to the principal of the loan, you’re regaining equity in your house as soon as possible.

He believes that because home equity loans have fixed interest rates, securing one at a low rate now will ensure that you have a low rate for 15 or 20 years down the road.

When applying for a home equity loan, it’s important to know the whole cost of your project, Sachs advises. At the time of loan underwriting, he suggests acquiring a quote.

Credit cards are number five

Menard thinks credit cards with high APRs are ideal for minor upgrades like a fresh coat of paint or a few new pieces of furniture. Rocco adds that they can also help cover unexpected repairs or other costs during the project.

Short-term initiatives that can be paid off before the promotional period expires benefit most from 0% APR credit cards.

It’s possible to suffer high interest rates if you don’t pay off your credit card during the promotional period of 12 to 18 months.

Loans from the federal government

Menard explains that the Department of Housing and Urban Development offers Title I Loans, which can be used to finance a home improvement project with little or no money out of your own pocket.

According to him, these are government-issued loans with certain criteria that vary by state and municipality. According to HUD, they’re for “basic livability or utility” repairs.

An energy-efficient mortgage offered by the government may be available to you if your plans involve energy-conscious upgrades.

The judicious use of any sort of credit, including a personal loan, is critical. While personal loans can be beneficial, they should never be taken casually or without thorough consideration of your overall financial situation. If you need a personal loan or cash advance, PaydayNow can help. Applying for a bad credit loan online is quick and simple. Please fill out an application as soon as possible!


Jamie Johnson

Personal Finance Writer | + posts

Jamie Johnson is a freelance writer with a focus on business and finance who lives in Kansas City. She covers a wide range of personal finance themes, including credit card creation and construction, as well as personal and student loans. Her work has been featured in Business Insider, CO by the United States Chamber of Commerce, GOBankingRates, and Yahoo! Finance, in addition to contributing articles for PaydayNow.