The pros and cons of a home improvement loan

Renovating your home can improve its function and aesthetics. Doing so, however, may be expensive. If you don’t have the cash to cover all or part of a home improvement project, you may want to explore home improvement loans. Since there are a number of options available, we’ll dive deep into the pros and cons of each. This way you can choose the right home improvement loan for your unique situation. 

Home equity loans

Home equity loans use the equity in your home as collateral. This means if you default on your loan, the lender will have the right to foreclose your home. Depending on the lender, you may be able to borrow anywhere from 85% to 100% of your home’s equity, and receive the funds in one lump sum payment. 

Pros:

  • You’ll enjoy a low, fixed interest rate you can budget for in advance.
  • You can use the money for any type of home improvement or any other purpose. 
  • You might be able to deduct the interest payments on your taxes. 

Cons:

  • You put your home on the line.
  • You may pay closing costs ranging from 2% to 5% of the loan amount.
  • You’ll have two monthly  payments. 

Home Equity Lines of Credit (HELOCs)

HELOCs are a lot like home equity loans as they’re also secured to your home equity. The greatest difference, however, is that you don’t receive a lump sum of money at once. Instead, you’ll be able to withdraw funds from a credit line as much or as little as you’d like. There is a  set credit limit, which depends on the equity of your home and credit history. You’ll pay the principal amount you have borrowed and any interest on that amount. 

Pros:

  • You can access funds whenever you need to.
  • You might qualify for a low interest rate.
  • You may be able to deduct the interest from your taxes.

Cons:

  • You risk losing your home.
  • You’ll have a variable interest rate that may go up or down.
  • You might overspend.

Personal loans

If you don’t have sufficient equity in your home, you may be able to take out a personal loan to finance your home improvement. Home improvement loans can be unsecured, meaning they don’t require collateral. They’re typically offered by most banks, credit unions, and online lenders so you can shop around to find the best loan for your particular needs.

Pros:

  • You can usually apply online. 
  • You may receive funds quickly.
  • You won’t have to use your home as collateral. 

Cons:

  • You might receive a higher interest rate.
  • You may have to pay fees, like origination fees and late fees.
  • You’ll likely need to accept a shorter repayment term.

Cash-out refinances

With a cash-out refinance, you tap into your home equity to replace your original home loan with a larger one and pocket the difference in cash. Let’s say you have $100,00 in equity in your home but still owe $200,000 on your mortgage lender. If your home improvement project costs $20,000, you can get a cash-out refinance for $220,000. 

Pros:

  • You might lock in a lower rate than you would with a home equity loan or HELOC.
  • You can potentially deduct the interest on your taxes.
  • Your repayment period may be longer.

Cons:

  • You risk a home foreclosure.
  • You’ll need to pay closing costs. 
  • You’ll pay more in interest in the long run.

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