Home ownership comes with all sorts of responsibilities and tribulations, some more expensive than others. Basic home maintenance is, of course, something that must be on every homeowner’s priority lists and budgets. But what about the major repairs that arise unexpectedly, or the exciting renovation projects that add value to your property? That’s when financing can help. The next question is what type of loan is best for home improvements? There are many types of financing available, but the most logical, versatile and flexible are home improvement loans. Alongside fixed rates, flexible terms and varied amounts, they are easily set apart from different types of financing because there are no requirements on how the monies are spent. Selecting how to pay for needed repairs and exciting projects is not one size fits all, let’s explore the different options.
What Are The Different Types of Home Improvement Loans Out There?
When shopping around for home improvement financing, there are many variables to consider. With numerous loan options to choose from when deciding how to pay for home renovations, sometimes it comes down to repayment terms. Fixed terms and ease of application are other ways to compare financing choices.
Home Equity Line of Credit (HELOC)
One of the common choices for home improvement loans is a home equity line of credit (HELOC). As the name suggests, this type of loan relies on the existing equity in your home. When you use your home as collateral, you’re at the mercy of the market price for your home and neighborhood, which can affect how much money you can pull out at one time. HELOCs often come with adjustable or high loan rates, inflexible repayment terms and rules about how much or little money you borrow. Unlike some other loans, HELOCs also often come with closing costs, and origination fees, which can make them more costly.
The reason some borrowers opt to rely on a HELOC is when they have ample equity in their home, and want to be able to decide exactly how much to borrow against that equity. It’s important to balance whether the up front costs balance the long term financing fees to determine whether it’s worthwhile.
Home Equity Loan (HEL)
Home equity loans (HEL), often referred to as a second mortgage, are similar to HELOCs in several ways. They rely on the existing equity in your home, they are considered a home equity line of credit and there are usually upfront costs associated with the loans. The advantage of a home equity loan is that there are long terms available and usually come with fixed rates. An HEL is different from a HELOC in that you must borrow the full amount of equity above what you owe on your existing mortgage. This will be delivered in a one-time lump sum minus the closing and origination fees. This option is ideal for big projects that can be repaid over a longer period of time.
One of the most straightforward ways to finance a home improvement project is with your credit cards. With no approval process, application fees or collateral, you can embark on your project right away, which can be an advantage, especially in an emergency. However, credit cards often come with high interest rates, generally much higher than other types of financing. It’s also possible that you may not have a large enough existing credit limit to cover the whole project, which can either bring the whole process to a halt, or require another type of loan in tandem.
Credit cards are helpful for emergencies and for home improvement projects that are small or lower cost, but don’t make sense for big projects that may take some time to pay off.
FHA 203(K) Rehab Loan
An FHA 203(k) rehab loan or a renovation loan is usually used when a homebuyer is purchasing a fixer upper home that will need major repairs right away. Instead of multiple loans, the FHA 203(k) rehab loan bundles both the home’s purchase price and the renovation costs in one loan. This ensures there is only one interest rate and one loan, rather than with a HELOC or HEL where the financing is a separate loan (and payment) than your mortgage.
Although this loan works well when purchasing a property, it is not an option when you already own your home and need to make repairs or renovations. Because it is a full mortgage, your debt to income ratio, credit score and annual salary will come into consideration
Unsecured Personal Loan
An unsecured personal loan is the go-to financing path for home improvement projects for many reasons. Unsecured means that you won’t have to use your home as collateral, which means that you’re not at the mercy of the real estate market. A personal loan often comes with a shorter loan term, fixed rates, and can come in a wide range of amounts, so you can pick and choose based on your unique project.
Getting approval for personal loans is usually an easy process based on your credibility and delivers the funding quickly, which means you can get the job done efficiently.
Are Personal Loans the Best Type of Loan for Home Improvements?
When it comes to what type of loan is best for home improvements, personal loans are easier to access and fund quicker than other loans. This ensures that you can start to tackle your home improvement process promptly. They come in variable amounts to fit any of your home remodeling projects from the smallest fix to the largest overhaul. Some of the most common home remodeling projects include:
- Windows: The average cost to replace windows range from $400 to $1,200 per window, which can add up, especially if your home has many windows.
- Decks and Patios: Adding a new deck or patio can cost between $2,500 and $10,000 depending on size and scope.
- Roof: On average, replacing a roof costs between $4,700 to $10,500 and up, depending on the size of your home and materials selected.
- Flooring: Obviously flooring costs depend on material and square footage. But plan on spending anywhere from $3 to $22 per square foot.
- Kitchens: As one of the more extensive remodeling projects, budget anywhere from $10,000 to $50,000 to add new flooring, appliances, cabinetry and countertops.
- Bathrooms: Whether the smallest powder room or the largest master bath project, bathrooms are some of the more rewarding projects and can cost anywhere from $5,000 to $25,000.
- Basement Remodels: As one of the more expensive remodeling projects, finishing a full basement can cost from $20,000 to $75,000. [Link to Basement Remodel Cost blog post when published.]
How to Apply for a Personal Home Improvement Loan
When you’re ready to start tackling your home improvement project and get the necessary financing to make it happen, AmeriFirst can help. Get a personal loan from $5,000 to $80,000 with flexible terms and competitive rates with an easy, online only application process. Answer a few short questions and you’re on your way to getting the home improvement loan that will transform your house into your dream home.