What are the different types of home renovation loans, and which one is right for your home project?
Home renovations can be expensive. Sometimes they require a large sum of money upfront to cover labor costs, materials, permits, and other expenses. For many homeowners, this may seem like an insurmountable obstacle to overcome.
Thankfully there are ways of affording a home renovation without needing all the cash upfront. There are various types of loans that can help you finance home renovations.
This blog post will discuss the different types of home remodeling loans and which one may be best for your home project.
What Is a Home Renovation Loan?
A home renovation loan is a type of home improvement loan that you can use to pay for the cost associated with home renovations. Many homeowners will take out loans from their bank or credit union, while others may choose online lenders.
A home renovation loan depends on home equity as collateral to secure the funds. This means that you must own your home and have enough home value to qualify for a loan of this type.
These loans can be used towards any home renovation project, including projects like:
- Kitchen or bathroom remodels
- Roofing repairs
- Landscaping upgrades
- Room additions/remodeling
- Siding replacement
- Painting and decorating services
- Insulation installation
These are just a few home renovation projects that home renovation loans may cover.
Types of Home Renovation Loans
There are many different types of home renovation loans, each with its own pros and cons. It is important to understand the different options when you’re looking into financing your next home project.
1. Personal Loan
Personal loans are unsecured loans that aren’t backed by any collateral. These loans can often be acquired through online lenders, allowing you to receive the funds within just a few days or weeks.
Many banks and credit unions offer personal loan options for home renovation purposes as well. However, these bank-issued mortgages tend to come with higher interest rates than those offered by online lenders.
The advantages of personal loans include:
Quick approval: Personal loans can typically be approved within a few days or weeks. This is much faster than the approval process for other types of home renovation loans.
Low-interest rates: There are many personal loan options that offer lower interest rates, which means you’ll end up paying less in the long run compared to traditional types of financing like home equity lines and mortgages.
Fast application process: Personal loans are processed quickly, allowing you to get the funds on time.
No Lien Required: Personal loans are unsecured, which means you do not need to place a lien on your home to qualify for the loan.
The disadvantages of personal loans include:
Small loan amounts: Personal home renovation loans often have lower maximum loan amounts than other types of financing. This means the home renovation projects you can afford with these loans are restricted.
Affected by your credit score: Borrowers with a low credit score may have difficulty qualifying for personal loans. Creditworthiness is one of the main factors that lenders consider when approving these loans.
Personal home renovation loans can be a good choice for homeowners who want to complete smaller projects like kitchen and bathroom remodels. They may not be suitable if you need to take out a large loan for a larger project like an addition.
2. Home Equity Line of Credit (HELOC)
A HELOC is a loan that allows homeowners to withdraw money against the equity in their home. The types of funds you can access with this type of financing depend on how much equity you have available and your credit score.
Your lender determines your borrowing limit based on these two factors, allowing you to make withdrawals up to the predetermined amount.
HELOCs are typically secured loans because they’re backed by collateral. However, some lenders offer unsecured types as well. These HELOC options tend to carry higher interest rates than those that require collateral.
There are also different types of features associated with HELOCs:
Draw period: This is the time frame during which you can make withdrawals from your line of credit. The maximum draw periods for HELOCs generally range between 10 and 20 years.
Repayment options: Many HELOCs offer multiple repayment options such as annual and monthly. These types of features can help make paying off your loan much easier when you’re trying to complete a home renovation project on a budget.
Annual fees: Annual fees are an additional cost that’s associated with HELOCs. These types of charges can vary depending on the lender.
The advantages of HELOC include:
Easy access– Withdrawing money from a HELOC is quick and easy. Depending on the lender’s policies, you can typically receive your funds in just a few days or weeks.
Little/no closing costs: Compared to home equity loans, HELOCs often have a lower closing cost which can save you money.
Have a revolving balance: HELOC loans don’t require you to make monthly payments like other home renovation financing options. This makes it easier for borrowers who are on a tight budget. They can spend the funds however they want without being forced to pay each month.
The disadvantage of HELOC include:
High-interest rates: HELOC loans generally have high-interest rates. This can make it more expensive to borrow money for your project in the long run.
Fees: HELOC usually have an annual fee which can increase your costs.
Adjustable loan rates: HELOC loans tend to have adjustable rates which can change over time. This means the types of interest you pay on your loan could increase in the future.
3. Credit Card
Credit cards are unsecured types of financing that allow borrowers to borrow money using the credit in their accounts.
You can use your credit card for various home renovation projects, including minor repair work and larger types like additions or remodels.
Some lenders also offer 0% APR promotions on these loans, which means you can finance your project interest-free with low monthly payments over time.
The advantages include:
Quick and easy: Applying for a credit card type of home renovation loan is quick and easy. You can usually receive your funds in just days after you’re approved, depending on the lender.
Flexibility: Credit card loans are unsecured, so there isn’t any collateral needed to qualify for the loan.
The downside includes:
High APR/interest rate: Interest rates on these home improvement loans tend to be high because they’re unsecured.
Fees: Credit card loans often have fees that can increase the overall cost of your project.
Lower borrowing limit: Most credit cards don’t offer very high borrowing limits, limiting your financing options.
4. Home Equity Loans
Home equity loans are a type of home improvement loan based on the borrower’s existing property.
The total amount you can borrow through this type of financing option is limited to what your house is worth minus whatever debt you owe for it, such as a mortgage or other types of liens.
A home equity loan is a good idea if you need a larger amount of money for your home renovation project.
The advantages include:
Higher borrowing limit: The maximum loan amounts through this type of financing option are often much higher than other types like HELOCs or credit cards. This makes it easier to finance large projects.
Fixed interest rates: Home equity loans often have fixed interest rates which can keep your costs consistent over time.
Long repayment terms: This type of loan typically offers the borrower a longer repayment timeframe. This can be beneficial if you need more time to afford your monthly payments.
The downside includes:
Higher closing cost: Home equity loan financing options usually come with higher closing costs than other types like HELOCs or credit cards. This can increase the total amount you pay for your project in the long run.
Adds a second mortgage: Home equity loan types of financing options have a second mortgage. This means you’ll need to make monthly payments on both your primary and secondary loans. This can add more strain to your budget if you don’t plan accordingly.
Which Is the Best Home Renovation Loan?
All of the types of financing options listed above have their own advantages and disadvantages.
However, personal loans are the best option for home renovations because they offer quick and easy financing, affordable interest rates, and flexible repayment terms.
You can get a lender like Plenti to help you get the lowest home renovation loan rate, regardless of your financial situation.
Get Personal Home Renovation Loans
If you’re planning a home renovation project, it’s important to understand the different types of home renovation loans. You can then make an informed decision about which type is best for your specific needs and budget.
We hope you’ve found this home renovation loan guide helpful. Check out our blog for more crucial tips and guides.