Paying for a home improvement project can be almost as complicated as buying a home. You have several options:
- Save money first.
- Borrow against your home through a home loan, line of credit or mortgage refinance.
- Use a credit card or take out a personal loan.
Obviously, saving and paying for repairs from your pocket will be the cheapest option. Secured loans such as a refinance loan, line of credit or home equity loan are secured by your own home; Interest rates tend to be lower than on a credit card, but the borrower risks losing the home if payments are not made.
But if you do not have much equity in your home, the project is relatively small in scope or you do not feel comfortable wagering the house, a personal loan or credit card may be a convenient option.
Options to consider
A personal loan is not insured by your home; the interest rate you receive depends on your creditworthiness. Personal loans have fixed interest rates, which means you can reliably plan monthly payments on a budget. The repayment period is also shorter than a secured loan, typically two to five years.
Since the loan is not insured, the interest rate will be higher than what you would get on a home equity loan or line of credit. Nor can you claim a tax deduction on interest as you normally would with mortgage payments.
Personal Loans for Home Improvement
The amounts of personal loans range from $ 2,000 to $ 100,000 and vary depending on the lender. Lenders can market the use of a personal loan for home improvement, but the interest rate will depend on your credit score, credit history and debt-to-income ratio.
Credit unions: Your local credit union is the best place to get a personal loan. Credit unions offer lower rates than online lenders, and try to make sure that your loan is affordable. The maximum APR in federal credit unions is 18%.
Federal Programs: Some government programs can help pay for a home renovation. The Federal Housing Administration has two programs: Title I Loans and Energy Efficiency Mortgages.
Under Title I, the US Department of Housing and Urban Development authorizes lenders in each state to make home renovation loans of up to $ 25,000. You do not need equity in your home to qualify because the loan is insured by the FHA. The interest rate can be higher than a traditional secured loan, and is determined by the lender based on market rates and their solvency. Look for a “Title I Home Improvement” lender in your state on the department website.
The Energy Efficiency Mortgage Program allows homeowners to finance part of their energy efficiency improvements, such as solar panel ceilings, wall insulation and furnace pipe repairs.
Online lenders: All lenders look at your credit, but some online lenders consider other factors besides, such as your education, income and profession. You can check your interest rate on various lenders without affecting your credit, so it is worth buying around the lowest rate.
The larger the loan, the greater the benefit of the purchase rate, because you will pay much more in interest for a small difference in the annual percentage rate.
Most lenders charge the same rate for all personal loans, regardless of what the borrower wants to buy. Many other online lenders cater to people with good or excellent credit, too.
Personal Loans Vs. Other financing methods
The best method to finance your home renovation will depend on your financial situation and how much equity you have in your home.
Credit Cards: If you have excellent credit and a small to medium size home improvement project, you can apply for a credit card with a 0% interest to cover expenses. You must first make sure that you can pay the card before the end of the promotional period, usually 12 to 18 months. If you qualify, you will not pay interest for that promotional period. However, as with any credit card, you may be tempted to spend too much, and using too much of your available credit can hurt your credit scores.
If your credit is not great, you are better off with a low interest secured loan.
Mortgage Loans and HELOC: Mortgage loans and mortgage lines are still popular methods to finance a home renovation. Both are cheaper than a personal loan. A mortgage loan is a lump sum at a fixed interest rate, while HELOCs have a credit limit at variable rates that fluctuate with the prime mortgage interest rate.
Cash-out refinancing is another option – you refinance your existing mortgage into a larger loan amount and use the difference to pay for your renewal.
Rates vary depending on the lender, loan amount and equity in your home. Interest payments on all types of mortgage loans are usually tax deductible.