Using personal loans for home improvement
Other ways to pay for home improvement
A home renovation loan isn’t the only way to cover these large expenses. If a personal loan isn’t what you had in mind for your home improvement needs, then explore the other options on the table.
A credit card may be the most accessible method of paying for your home improvement jobs. This is especially true if you already have a credit card in your wallet with a high enough limit. You do not have to fill out another loan application. Instead, you can start recovering costs with your plastic right away.
But there’s a major downside to using your credit card for a home improvement loan. Those are the high interest rates associated with credit cards. That higher interest rate can mean you have to pay a lot more financing costs for the same home improvement.
If you need to get your home renovation started right away, consider credit cards as a temporary solution. However, look for a more permanent option in the form of a loan with lower interest rates.
A home loan is essentially a second mortgage loan based on the equity you have built up in your home. Equity is the difference between the current value of your home and your outstanding mortgage balance. So if you own a $250,000 house and still owe $100,000 on the mortgage, you would have $150,000 in equity.
You can’t borrow all of the equity you’ve built up in a home. But depending on your situation, you could tap into a relatively large loan amount. After receiving the lump sum loan amount, you make regular monthly payments for a set number of years.
If you default on the loan, the lender has the right to seize the home. For homeowners who can commit to another mortgage payment and want to make many improvements, a home equity loan could be a good choice.
Home equity lines of credit (HELOC)
Like a Home Equity Loan a Home Equity Line of Credit (HELOC) is based on the equity you have built up in your home. But unlike a home equity loan, a HELOC is a revolving line of credit that you can draw on as needed.
When using a HELOC, the credit details feel more like a credit card. This is because you can withdraw money when you need it during the drawing period. However, you still need to make regular monthly payments to balance this balance. And remember, this monthly payment is on top of your existing mortgage payment.
If you’re not sure exactly how much your home renovation will cost, this type of financing gives you the flexibility you need to cover the costs. But you will use your home as collateral for that line of credit. This allows the lender to foreclose on your home if you default on your payments.
Cash Out Refinancing
A Refinance cash out you can take out a new mortgage loan with different terms. If you have built up equity in your home, this type of loan allows you to withdraw a lump sum.
Of the financing options on this list, you’ll likely unlock the lowest interest rate possible with a payout refinance. However, make sure you can get a lower interest rate than your current mortgage rate before you jump in.
You need to know what the cost of your home improvement project is before you complete your payout refinance. Otherwise, you may not be taking out enough to complete the project. With this funding solution, you will not be able to withdraw funds as needed.
In addition, you have significant upfront costs for refinancing with a payout. Essentially, any closing costs you paid for your original mortgage will have to be paid again for your new loan. Typically closing costs run into thousands of dollars. Take the time to run through the numbers before proceeding with a payout refinance.