Which of these 7 Home Improvement Loans is Right for You?
By Shannon Wells
Have you been dreaming of a newly remodeled kitchen? Or crossing your fingers that your roof will make it through one more winter? Owning a home means there’s always a new project on the horizon. But, whatever your upcoming project may be, the first step is always the same: figuring out how to pay for it. From traditional home improvement loans to reverse mortgages, here are eight ways to finance your next project.
1. Home Equity Loan
Also known as a second mortgage, a home equity loan lets you borrow against the equity you’ve earned over the years. The amount of equity you have is the difference between your home’s value and the amount you owe. For example, if your home is worth $300,000 and you owe $200,000, you have $100,000 of equity. Because of the attractive rates and long terms (15 – 30 years), home equity loans are a tried-and-true way to finance mid-size and large improvement projects. Banks used to let homeowners take out loans for 100 percent of their equity, but these days, loan amounts are capped at 80 percent. So, in this example, you could take out a loan for $80,000.
Note: If you’re using your home equity loan to pay for home improvement projects, the interest is still tax-deductible under the new 2018 tax plan.
2. Home Equity Line of Credit (HELOC)
A home equity line of credit, or a HELOC, may at first seem similar to a home equity loan. After all, both loans are classified as second mortgages that have tax-deductible interest. But, these loan products are quite different. Think of a HELOC as a credit card with a better interest rate and a higher limit than your typical card. Borrowers can draw on their HELOC for five to 10 years and then pay it off during the next 10 to 20 years, making this loan structure great for long-term projects. Homeowners also love HELOCs for their low closing costs at origination, which are just a fraction of a traditional equity loan closing costs. One downside is that HELOCs are commonly adjustable-rate mortgages (ARM), so be sure you can afford the payment at the highest possible rate.
3. Cash Out Refinance (Re Fi)
Homeowners who bought their homes when interest rates were high may find cash-out refinance loans especially appealing. Here’s how it works: If you have a $300,000 home and owe $200,000, you could refinance your current $200,000 loan along with up to 90 percent of your equity, giving you a new loan for $290,000. The additional $90,000 would be provided to you in cash up front and can be used to finance your home improvement projects. This loan is great for people who want to avoid having two mortgage payments a month. But it also resets the clock on your mortgage, meaning you’ll have to pay off your home all over again.
4. FHA 203k Mortgage
A 203k is commonly used when a homebuyer purchases a distressed property, but can also be used by a current homeowner looking to make necessary repairs. This loan won’t work for a new sauna room or theater, but is a good home improvement loan option if you need to replace the roof, upgrade your HVAC or finish your basement.
5. Personal Loan
If you’re lacking in equity but have great credit, a personal loan may be a good fit for you. Because the loan ceilings are typically lower than that of an equity loan, personal loans work best for small or mid-size home improvement projects. One factor to consider is that the interest rates on personal loans are almost always higher than equity loans because a personal loan is not guaranteed by property.
6. Credit Card
If you have a smaller project in mind, signing up for a card with a 0 percent APR introductory offer may be the best way to finance it. Just be sure to pay it off before the higher interest rate kicks in.
7. Reverse Mortgage
For homeowners 62 and older, reverse mortgages offer a non-traditional approach to obtaining home improvement financing. Either paid monthly or as a line of credit (like a HELOC), homeowners can use their reverse mortgage to fund home repairs. This option doesn’t require any interest payments, but you must sell the home when the last borrower moves out.
If you want to avoid interest and payments entirely, consider saving up for your next project. Of course, for a large-scale, time-sensitive project this may not be feasible. But, for a powder room remodel or a small deck, cash is king.
Shannon Wells is a freelance writer. When she isn’t helping her clients grow their businesses, she writes about healthy food and home improvement.