Homes must be maintained, which requires money. Most people don’t just have money hanging around waiting to be spent on home improvements. A lack of funds usually means that home improvement projects have to be financed with a loan or another financing option. This is where a home improvement loan may come in. However, you want to have financing options so you can find the best loan that will keep you from paying too much for too long on a single home improvement project.
Also, keep in mind that these improvements add to the value of your home. This means that the $9,000 bathroom remodel or $20,000 kitchen remodel is going to pay for itself if you ever choose to sell your home. Doing these remodels comes down to finding the right financing option for you.
Coming Up With Cash for Home Improvements
The amount of money needed for the remodel can be discouraging, but don’t let it be. Here are ways you can finance your home improvement project:
1. Personal Loans
A personal loan doesn’t have any tax advantages, but it can be good if you don’t want to use home equity or use your home as collateral. You simply need good to excellent credit to obtain personal loan rates that could make this decision worthwhile. Personal loans are short-term loans with repayment periods of anywhere between five and seven years. This could mean paying less money in the long term, despite the higher interest. A number of companies like Discover and Avant allow you to apply online.
To check out some of the best personal loans for home improvement, use our filterable tool below. Simply enter your estimated credit score, annual income, and loan amount to see your best options.
Ask the Expert: Steven Millstein, Certified Financial Planner & Editor of CreditRepairExpert
When should you take out a home improvement loan?
There are a few factors to consider to determine when you should take out a loan to improve your home. Ideally, you should have good to excellent credit and a reliable source of income. Because the repayment schedule can depend on the finance option you choose, don't forget to consider your future plans.
Loans that are secured by your home, including HELOCs and second mortgages, must be repaid when you sell your home, for example. If you plan to sell your home within a few years, make sure you have a plan to pay back the loan by then or that you have accounted for the expense.
The closing process should also be taken into consideration. Unless you choose to finance your home improvement with credit cards, you can expect to go through an application and underwriting process that can take 6 to 8 weeks. If your goal is to start on your home renovation in early spring, you should take out the loan in the winter.
Is taking out a personal loan a good option for home improvement projects?
A home improvement loan is an unsecured personal loan which means it isn't tied to your home. This type of loan can be easy to qualify for through an online lender and it may be possible to get the funds within just a few days. This can be a good option if you need the money to begin your project right away and you have very good credit to qualify for the lowest interest rates.
What about a home equity line of credit?
A HELOC allows you to borrow against the equity in your home. This is a unique loan option because it has a draw period and repayment period. During the draw period, you can take out the amount of money you need, as you need it, up to your approved limit. After a period of time, your draw period ends and you make monthly payments toward interest and principal. HELOCs almost always have variable interest rates.
A HELOC is a good choice if your renovation will go on for some time or you aren't sure exactly how much you need. During the draw period, you can make interest-only payments for extra flexibility. The downside is the interest rate is likely to rise and increase your payments.
2. Home Equity Line of Credit (HELOC)
Taking out a home equity line of credit is another financing method of borrowing against the home’s value. The original mortgage isn’t paid off, but you can borrow up to 80% of the home’s value minus the amount owed on the mortgage. There is typically a “draw period” of approximately 10 years, which is the time you have to use the credit line. The repayment period lasts approximately 15 years with payments going toward the interest and then the principal. Fortunately, a HELOC has some tax advantages. You can see this article to compare personal loans and HELOCs for home improvements.
3. A Second Mortgage
A home equity loan is referred to as a second mortgage. You don’t get a HELOC, but you are paid a lump sum of cash. If you are happy with your first mortgage and don’t want to refinance, this financing option may be the way to go. The interest rate may be a little higher than it would be if you simply refinanced your mortgage.
4. Use Existing Credit Cards
If you have credit cards, especially cards with high limits, you could finance your home improvement project. However, this option should be for smaller projects that you can pay off quickly. Credit card debt that hangs around too long is one of the biggest killers of credit scores. You never want to really carry a large balance on a credit card for a prolonged period. It’s ideal to pay off your credit card balances each month. If the project is one that you could pay off in a month, then this may be a good option for you.
Ask the Expert: Eric Rittmeyer, President of Fidelis Mortgage & Certified Reverse Mortgage Professional
Would you ever recommend taking out a second mortgage as a way to finance home improvement projects?
While this can be a great, cost effective (and possibly tax beneficial) tool to use, there are some things to consider:
Will the improvements add additional value to the property? Over-improving a property can spell trouble if/when you decide to sell. Before doing any major improvements, research your neighborhood to see what comparable properties are selling for. You might find selling the property and purchasing a new home to be a smarter move.
Can you afford the payments? Taking out a second mortgage means you're placing a lien on the property. This means you could run the risk of foreclosure in the event you're unable to make the monthly payments. Make sure you're 100% comfortable with the payments associated with the new mortgage.
Are there other assets available to draw from? Take a look at your current accounts to see if withdrawing from them may be a better option instead of taking on a loan with monthly payments. I would highly recommend talking with your tax professional and/or financial advisor before making any final decisions on this. Although you'd be accessing funds without incurring a monthly expense, there could be tax ramifications and/or withdrawal fees.
What about refinancing a mortgage that you currently own? Would this be a good idea?
The one great thing about a low interest rate environment is borrowing money is more affordable. Instead of using a second mortgage to access funds, refinancing your existing first mortgage might be a better option.
For starters, the interest rate for a first mortgage will be lower than a second mortgage. In addition, if you’re able to reduce the current rate on your existing loan, you may be able to borrow additional money and not realize an increase in your monthly mortgage payment.
This could be a more costly option (in comparison to a second mortgage) in terms of settlement costs. The key is how much are the total settlement costs and how long will it take you to recoup them?
Are there any other financing options available?
Although there is a minimum age requirement, the federally insured reverse mortgage program can be a great option for homeowners 62 and over who are wanting to make improvements to their property.
A lot of our clients have reached a stage physically in their lives where they need to make adjustments to their house. A reverse mortgage will give them access to a percentage of their property value and will not require any monthly principal and interest payments.
They could draw the funds, make the improvement, and remain in the property of the rest of their lives. The interest is deferred until the end of the loan, which is when the last borrower permanently vacates the property (normally upon their passing). The property is sold, the reverse mortgage is paid off, and the heirs walk away with all of the remaining equity. There’s also a Reverse Mortgage for Purchase program for borrowers who would rather sell their existing home and purchase a new home with no monthly mortgage payments.
5. Refinance Your Mortgage
If you have a mortgage and the rate is higher than the current market rates, you can refinance the mortgage to lower the rate and borrow against the equity. This is called cash-out refinance. A lender will let you borrow enough money to pay off the current mortgage and take out an amount up to 80% of the home’s value to fund your remodel. Make sure you are careful in this decision because you are using your home as collateral for a larger loan. Remodel costs are also short-term costs, but you are taking on a long-term debt. Nonetheless, this is a common way to finance a home improvement project; in fact, it has been used before to offer a solution to paying student loans.
Making Your Home Your Dream Home
Overall, you have some great financing options for your home in 2018. Aside from simply saving the money, the above options can have you working on your project in no time. Using any of the different funding options can also allow you to do what you want rather than holding back on making your home your dream home.
*Payment example: Monthly payments for a $10,000 loan at 9.34% APR with a term of 3 years would result in 36 monthly payments of $319.58. LightStream disclosures here.
My home is paid off. I am a union operating engineer that is payed off at the moment. I only have time to do home improvements when laid off. How do I get a home improvement Loan while not at work ?
Hey Nathan,
Thank you for the comment! Below is an article that can help you decide if you need a cosigner before applying:
https://lendedu.com/blog/personal-loans-with-co-applicant
Recently I loaned money from a bank in the front of my home and the reason is to loan that I want to renovate my house for some days. These Home Improvement Loans & Financing Options are great and best in this year with effectively.