Major home improvement projects can really put a dent in your wallet. To avoid the financial stress associated with repairs and upgrades, many homeowners turn to home improvement loans. If you lack the cash, a home improvement loan allows you to make the renovations you want by borrowing the funds to do it. Like any type of loan, you will be responsible for making monthly payments until the balance of the loan is paid off. Once you have made the decision to apply for a home improvement loan, find one that meets your remodeling needs.

Secured Home Improvement Loans

The term ‘home improvement loan’ refers to a variety of loan types used to finance repairs and renovations. One of the most common types of home improvement loans is secured loans. A secured home improvement loan consists of a borrower financing their home improvements by borrowing against their home equity. Your home’s equity is equal to the current value of the property minus any outstanding loans against the property, like a mortgage. As you pay down the mortgage, the home equity increases.

While the collateral on a secured home improvement loan is usually a house or the equity in the home, it can also be another asset, such as a business or vehicle. The value of your collateral and your credit score will help determine the interest rate on your home. The value of the collateral that secures the loan may need to be accessed by a lender. If your collateral is a home, a real estate appraiser will look at the property and compare it to other homes in the area. If your collateral is business, the lender may want to see your sales and profit records for the last several years.

Home Equity Lines of Credit

Home equity lines of credits, or HELOCs, are a type of “revolving” debt, similar to a credit card. With this type of funding, your lender will set a maximum credit limit based on the amount of equity in your property. You then have the option to borrow money for home improvements on an as-needed basis. The period in which you can obtain money for your home improvement project is known as the “draw period.” The draw period usually lasts multiple years, allowing ample time to complete your home renovations.

Once your draw period comes to a close, you will need to repay the funds borrowed. HELOCs can have variable interest rates meaning that the interest rates may go up or down throughout the repayment period. Draw periods typically span 5 to 10 years, in which only interest must be repaid. Repayment periods are usually 10 to 20 years in length. During repayment, the borrower will need to make the interest payments in addition to making payments on the principal. In some cases, a lender may require you to repay the entire balance of the loan at the end of the draw period.

Home Equity Loans

Like HELOCs, home equity loans are based on the equity in your home. However, unlike HELOCs, the funds are delivered all at once. Home equity loans are also favored for their fixed interest rates and established maturity dates, meaning you pay the same amount in monthly payments. A home equity loan is like getting a second mortgage. The first mortgage is the money borrowed to buy your home. When you have sufficient equity in your property, you can then take out a “second mortgage” to acquire additional funds for purposes such as home improvement.

There are many reasons that home equity loans are appealing to both lenders and borrowers. They typically have lower interest rates than secured loans, which helps to maintain low borrowing costs. They are also usually easier to qualify for, even if you have a lower credit rating. With a home equity loan, you may be eligible for a relatively large loan amount, depending on the amount of equity you have in your home. Home equity loans may also result in tax benefits. In many cases, the interest costs on a home equity loan are tax deductible.

Unsecured Home Improvement Loans

In some cases, a borrower does not want to use their home equity as collateral for a loan or may not have enough equity built up to cover a loan. When this happens, an unsecured home improvement loan can be used. This type of personal loan is not only suitable for larger home renovations and remodels, but can also be used for smaller projects and unexpected repairs. You also do not have to be a homeowner to take out an unsecured home improvement loan. Individuals who live in rental properties and do not have equity can also take out these loans.

The terms of the loan, including the interest rate, is primarily dependent on your credit rating and history. The lender will access your overall ‘creditworthiness’ and your ability to pay back your debts when qualifying you for a loan. These personal home improvement loans can range from a few hundred dollars to thousands of dollars, and will usually have a fixed interest rate. As the loan is unsecured, the interest rate will generally be higher than with other types of home improvement loans. After getting approved for an unsecured loan, the money will usually be available to you within a few business days.

While you may have dreams about your ‘perfect’ home, you may not have the funds to make it happen. Home improvement loans are the optimal choice for homeowners who want to make repairs, renovations, or remodels, but do not have the cash to do so. There are several types of home improvement loans that you can apply for, each with their own set of benefits and drawbacks. If you are ready to make improvements in your home, talk with a local lender today about your situation. Together, you can determine which type of home improvement loan is best for you.